How to create a Brexit-Proof Retirement Plan

How to create a Brexit-Proof Retirement Plan
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Markets, prior to the Brexit-referendum, have for some time been turbulent; EValue had already raised concerns for individuals deciding to take their retirement income through drawdown. Bruce Moss, EValue's Strategy Director, previously warned that "Five years of volatility could lead to a decade of lost income for the first retirees to take advantage of pension freedoms, if market conditions continue on the same trajectory."

Following the UK’s vote to exit the European Union (EU), the financial markets have been thrown into a period of uncertainty which could last for many years until the UK’s relationship with the EU and the rest of the world is clarified. This should raise the alarm for advisers and their clients relying on drawdown for their retirement income.

In response to the referendum result, EValue fast-tracked the July update of its economic scenario generator Insight and the optimised asset allocations it produces. These were made available to our clients within days of the referendum result. This update shows that lower risk asset portfolios in particular, had increased in risk, and for at all portfolios potential future returns have decreased. As a result and reflecting the potentially fundamental change (at least for the foreseeable future) that Brexit has made, EValue made a number of changes to our optimised model portfolios, including:

  • Reducing the floor on UK government bond yields to -1.0%, previously this was set at 0%;
  • Removing restrictions applied to investment in developed overseas equity markets i.e. eliminating home country bias which historically UK investors have;
  • Removing restrictions on quarter on quarter changes to UK commercial property, which is designed to prevent costly switching of property assets.

These changes, especially the latter proved to be very well founded with news of Standard Life, Aviva, Columbia Threadneedle, Canada Life, Henderson and M&G suspending withdrawals from their commercial property funds and Aberdeen cutting the price on redemptions by 17%. It is important to note that EValue does not manage money and therefore is an independent and unbiased authority taking a long term view of investment opportunities.

Brexit and the ensuing market turbulence highlights the critical value that advisers can offer their clients by providing regular communications and updates, especially with those clients who are approaching retirement, or currently in retirement.

During a time when the economic climate can literally change overnight there is much value in regular reviews of client’s retirement plans and making strategic adjustments when needed.

What should advisers be doing for retirees post Brexit?

Advisers have a crucial role in ensuring their clients’ retirement plans are Brexit-proof.

Pre-Brexit retirement plans will have been made based on a series of assumptions and forecasts of potential returns that will no longer apply in the new world of uncertainty that we are likely to inhabit for potentially many years. The combination of lower prospective returns and higher volatility is a dangerous cocktail for retirees using drawdown to provide themselves with an income – particularly if they are in the early years of retirement. Retirees’ retirement income plans should be selectively reviewed to make sure that they are robust in the new economic environment. It is possible that the level of income being drawn is too high to be sustainable for life. Advisers can provide a valuable service by giving their clients a timely warning and for those clients that may be particularly vulnerable because they were “pushing the limits” recalculating the sustainable income.

While not wanting to be accused of perpetuating “Project Fear”, advisers should be suggesting to clients that regular reviews of drawdown plans should be carried out until the dust settles from the referendum result and it is clear what Brexit actually means for long term future investment returns.

The role of planning tools to produce a Brexit-proof retirement plan

At the centre of any Brexit-proof retirement plan will be a suite of planning tools that provide realistic projections of future risk and return, and help advisers communicate this to their clients. At the core of all planning tools, are the projections and asset allocations that must be powered by a realistic and reliable asset model. Tools can also help to dramatically reduce the cost of carrying out the regular reviews of drawdown which are particularly important in turbulent investment markets.

As mentioned earlier, in our recent asset allocation update, nearly all asset classes since the Brexit referendum have lower future return expectations. This means that a plan set up to meet a specific retirement income objective may well no longer be on track to meet the original target.

Clients of EValue that use our forecast returns and asset allocations, receive updates on a quarterly basis and we have the ability to update these more frequently as we did within days of the referendum result. By having the latest and most realistic returns and asset allocations when meeting with clients, advisers can ensure that the recommendations they are making match their clients risk profiles, and that any income drawn is sustainable and achieves their clients’ retirement goals.

Conclusions

As mentioned earlier in this post, EValue offers an unbiased and independent view of investment markets as we do not manage the consumers’ money. EValue takes a long term view of the relative attractiveness of different asset classes and produces asset allocations designed to achieve optimised returns for different levels of risk. Considerable investment has been put into our economic scenario generator, Insight, and into the process for updating it and producing revised asset allocations. This enables us to react swiftly in response to events, such as Brexit, when we were able to communicate to our clients the potential impact of Brexit on asset allocations within 3 days of the referendum result.

As a country, Brexit takes us into uncharted territory and we are facing an era of turbulence that is likely to continue for some time. Economic and investment market shocks may become the new norm. Consequently consumers are going to need a lot of handholding and support to make informed decision based on intelligent and relevant recommendations. This will only be possible if advisers are conducting regular updates with their clients using tools that provide reliable and realistic forecasts, based on the latest asset allocations.

If you would like to discuss EValue’s suite of retirement planning tools, quarterly asset allocations or any of our financial technology solutions, contact us today.

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