Looking ahead in 2017
This year I will be looking at the changing nature of the retirement income market. There are some big topics to get our minds around including;
- the role of robo-advice
- sustainable income levels from drawdown
- the future for annuities
- how to invest taking into account post Brexit economic conditions and Trumponomics
Each month I will look at how topical issues are impacting on retirement income planning but to start the year off I will take a quick look at the major issues that could influence the way advice is given and decisions made.
I didn’t think Trumponomics was a real word until I looked it up and saw it described by Investopedia as the economic policies of Donald Trump who won the presidential election on the back of bold economic plans such as cutting personal and corporate taxes, restructuring U.S. trade deals and introducing large fiscal stimulus measures focused on infrastructure and defence. Trumponomics is dogged by a lack of consistency, coupled with a style of delivery that often leaves room for multiple interpretations, has made putting predicting what will happen to the US economy challenging.
In fact, in the short time between writing this and being published the incoming administration may have already made some policy announcements where the effects will start reverberating around the world.
I need say no more other than all eyes will be on the US to see what happens next.
Post Brexit economic conditions
With increased certainty about the UK’s negotiating position comes increased concern about how events may be unfold. It shouldn’t matter if you are a ‘glass half full or half empty’ person because although the future is uncertain there are several things to watch out for. The first is the impact of a weak pound which may translate into higher inflation and interest rate (see my comments on annuities below).
The second is the potential for ‘trouble ahead’ in the UK economy which may result in increased volatility in equity markets. If this proves to be case it will have been better have to have taken defensive action in advance rather than be caught on the hop. I may be wrong, but even if markets continue going up, it reminds us that sequence of returns risk is not an abstract concept but a real-world phenomenon.
Finally, there has been talk of relaxation for Solvency II which could help with pricing of annuities if less capital has to be put aside.
As with President Trump, look out for the unexpected.
The future for annuities
There should be no need for me to hark on about rising bond yields and rising annuity rates as this should be self-evident. Instead watch the relationship between annuity yields and the expected returns for lower risk drawdown portfolios.
If, and at this stage it is a big if, the yield on the benchmark 15 year gilt increases from the present level of 1.8% to 2.5% or more, and equity returns come off the boil, perhaps annuities will once again start giving drawdown a run for its money.
My instincts tell me that this dynamic may be the one to watch in 2017.
Follow annuity and gilt trends each week - this is a new chart
In conclusion, now that the dust has settled on pension freedoms and less people are taking their pensions as a cash sum, and with some much uncertainty in the world, deciding how best to convert a pension pot into income is probably one of the most complex areas of financial planning for middle Britain.