January is normally the time of year for predictions but this time around many of the big events for retirement income planning are already known.
However, these known events are at a macro-level and we should not forget that our clients are individuals; it will be how these macro-level events affect them personally that will influence the financial planning decisions they make.
So, what do we already know about now and the year ahead?
Well, earnings continue to lag behind inflation and, therefore, a number of households will continue to tighten their belts – or will need to do so. In April, many who are on the minimum auto-enrolment contributions will see their personal pension contributions increase from 1% to 3% of band earnings. Even after tax relief this will place a greater squeeze on their take-home pay.
Because the increase is being matched by a hidden pay rise (employer contributions will rise from 1% to 2%) the logical view is that employees should grin and bear the increase in their own contributions, because combined the increases will accelerate their accumulation of wealth. However, what is the message to those who believe they cannot accommodate the increase? It needs to be more than, ‘You are giving up 2% of your pay.’ They need help in rearranging their household finances to be able to afford the increase in their auto-enrolment contributions.
And let’s not forget that not everyone has/is experienced a tightening of their household budget, indeed some are doing rather well. For them the auto-enrolment increase may be the trigger to consider putting more into their pensions.
Moving on, it appears from national figures that increases in house prices are reducing. At the same time we are led to believe we should be expecting a gradual increase in interest rates in 2018 and beyond. The government also seem determined to deliver an increased housing supply although it may take several years before their policies impact on house prices and rents.
Here there are conflicting messages. Should someone who is contemplating a house purchase hold off, in the hope that their new house becomes more affordable, or should they move quickly before house prices become less affordable and mortgages become more expensive?
House price changes are of course not uniform, varying between regions and areas within a region. Everybody is going to be in a different position depending upon their income, where they live and what income they have.
Many could reduce their household outgoings by remortgaging. Would that help their household budget while at the same time helping them to afford the 2% increase in their auto-enrolment contributions?
In terms of the post-55 retirement housing/lending market, we know that equity release rates are at a record low. For someone who took out an equity release contract several years ago, would they be able to preserve more of their home equity for the beneficiaries by switching to a new contract with a much lower roll-up rate? For others, is the state of the housing market an opportune time to consider downsizing, or taking out an equity release contract before roll-up rates begin to rise?
For those already in retirement one big questions is whether investment markets at their post-crash highs? Should they be considering parking some of their gains in a cash sum so they do not have to surrender investments should markets have a sudden reverse?
This will to some extent depend upon the cash holdings they already have and what investments they are holding. Do they simply need a rebalancing of their investment portfolio?
This summer will see the government announcing its proposals on care funding – you may have a feeling of déjà vu around such an announcement as we have been here before – many times.
It will take several years before the proposals come into being and there will be a refinement of the proposals during consultations and the implementation of the requisite legislation.
While this coming summer may not be the time for re-jigging financial plans with future care funding in mind, the publicity the proposals will bring present an opportune time to ensure that powers of attorney, wills and estate planning are all up to date.
And what of the so-called ‘elephant in the room’? Overarching everything of course is Brexit, this year’s negotiations, and the type of deal we may (or many not) get prior to March 2019 when the UK is due to leave the EU. Depending on your views at a macro-level this could be just the trigger the economy needs to push UK onto a new prosperous future, or an unmitigated economic disaster.
The diverse views come from the fact that at an individual level such radical economic change means there are bound to be both winners and losers, at least in the short term.
These could be at industry, community or household levels; depending on how the negotiations progress the result will mean everyone will have different outcomes impacting upon their own situation.
How will your clients be affected individually and how should they be preparing? 2018 will certainly be the right time to put those plans in place.
There are, of course, no certainties in life – apart from that it is going to be an interesting year. Hope you all have a good one.
Bob Champion is chairman of the Later Life Academy