It’s not just the so-called “financial cliff” in the US we need worry about. Many of those approaching retirement face a similar precipitous drop with their own finances.
Those in their 50s and 60s – typical Telegraph readers if you will, or those who are most likely to have an adviser – have been badly hit by the financial crisis.
These are not the people who gorged on the credit boom, hammered their credit cards and used up the equity in their home to fund jet-set holidays. Many approaching retirement have tried to do the right thing: work hard, save for their future, contribute to a company pension plan and pay down debts where they can.
But they are now paying the price for this prudence. They may not have caused the economy to flatline, but they are the ones feeling the shockwaves from official attempts to resuscitate it.
Those with small – or paid-down mortgages – do not benefit from rock bottom interest rates. Instead, these low interest rates, combined with higher inflation – fuelled by quantitative easing – are eroding the value of their savings. And those “safe and steady” shares that used to be the bedrock of many people’s pension plans, like bank shares, have had a torried few years. Those who held £1,000 of Lloyds share prior to the financial crash, for example, now have a nest egg worth just £83.
All this has of course been well documented. What is perhaps less appreciated by those who find themselves in caught in this position is that it could get worse. Much worse.
In an attempt to avoid volatile stock markets and negative cash returns, many have ended up invested in bonds and, to a lesser extent, gilts. Sales of bond funds have soared in recent years and much of this has been driven by those either side of retirement, seeking income and a degree of capital protection. But there are now fears that a serious bubble is building within this asset class. It is not so much a case of will it will burst, but when.
And it is not just those that have actively sought out these bond funds in recent years that will be hit.
Many of those who contribute to a company pension invest in “lifestyle” funds where assets are gradually switched away from equities and into bonds as people approach retirement. Those that are moving into bonds and gilts now – when prices are at inflated levels – could see serious correction in the value of their pension funds just as they are about to crystalise their worth.
This age group will be disproportionately hit by a bond crash: they have more of their money in these “safer” assets and don’t have the time to work and save to make good such losses. And, as is often the case when people see their financial plans dashed, they will look for someone to blame. Advisers and the fund managers who are blindly shifting assets across should ensure that at the very least they have flagged up their warning.
And just to prove the truism that there is not a bad situation that can not be made worse by Government intervention, there are now serious rumours swirling that George Osborne will cut the annual pension allowance in next week’s Autumn Statement.
A reduction from £50,000 to £30,000 might seem less politically charged than removing pension tax relief for higher-rate taxpayers. After all, who manages to save this much into a pension each year? But those who work in financial services know all too well that lump sum contributions of this magnitude are not the preserve of the wealthy.
They are typically made by those approaching retirement who might have a redundancy payout, inheritance or even an endowment payout to make good those years when the mortgage, kids’ education, or a divorce had first claim on any surplus cash.
Kicking away this ladder and reducing this limit will make it far harder for people to to put repair their pension plans.
For those approaching retirement at an alarming speed the road has never looked more precarious. Advisers have their work cut out, not only highlighting the dangers ahead, but devising a safe path round them.
Emma Simon is deputy personal finance editor at the Telegraph Media Group