By Tony Watts, OBE, Director of RetireEasy.co.uk
Almost everyone agrees that pension’s freedoms are a “good thing”. But how (and when) is the market going to respond to the opportunity… and what do customers actually want? New research on the most affluent retirees has shed some interesting light on the problem.
So 6 April has come and gone without the sky falling in – rather like 1 January 2000 when all our computers neglected to crash. But there are still plenty of aftershocks likely following the introduction of Pensions Freedom, not least because the market has been unable to prepare itself in the 12-month window since the announcement.
Pension providers themselves have seen a doubling in enquiries, and (in the absence of a developed market) there are widespread concerns that those anxious to get their hands on their money (perhaps to clear debts) will fall prey to fraudsters. One political party has already seized upon the issue and made it a manifesto pledge to ban cold calling on pensions. Will others follow?
Certainly the research we recently carried out amongst a sample of 1500 subscribers demonstrates one failure on the part of pensions providers: just 46% of those asked had actually received any communication on what pensions freedom might mean to them. Even a holding letter along the lines of “sit on your hands” would have been something…
But there was some reassuring news in the research: those newly retired and pre-retirees with larger pension pots (average £1.5 million) are taking a more relaxed view – and not only as to when they tap into their pension funds.
For starters, it’s a firm farewell to the old “cliff edge” concept of retirement: amongst pre-retirees, only 4% do not plan to work at all after they reach retirement age. The rest will keep their hand in on a part time basis at the very least.
While 84% believe the new pensions freedoms are a “good idea”, 71% have no plans to take advantage of them, almost as many (65%) said they do not plan to sell their existing annuity, and 72% are not concerned about the lowering of the Lifetime Allowance.
When they do eventually withdraw part of their pension fund as a lump sum, only 12.8% plan to use some of their funds to buy an annuity. However, they do intend spendingsome of their available pensions cash: 61% plan to spend it on large items such as a new kitchen, a cruise or new car. Almost a quarter (23%) plan to reinvest in residential property, while 38% will either fully or part repay their mortgage.
The Pensions Minister famously received some overblown headlines about being relaxed about retirees blowing their pension pot – but just how relaxed should the retirees themselves be? After all, all the evidence is that many of us will still be relying on our nest eggs well into our 80s and possibly our 90s and beyond.
While there is no doubt that those with average pension pots (around £30 – 40,000) will struggle to get by, the picture we are picking up amongst the better heeled is one of extreme caution. While the average subscriber has an annual income of £68,555 they anticipate retiring on £43,000 pa after tax, mortgage and other debt payments. Yet they could, maintaining their existing revenue sources, actually afford to be drawing out just a few pounds shy of their current income: £68,467.
A large part of this will be made-up of the £23,590 they plan to earn on average from part-time work and a further approximate drawdown of £22,980 from their SIPP/ SASS (12,210 tax-free, £10,770 taxable). Of the minority (12.8%) who plan to buy an annuity, they expect this to provide an annual income of £7,305.
If they really wanted to push the boat out, they could add around an additional £9,000 a year simply by downsizing.Moreover, while only one in ten is anticipating ever going into a care home, those that do are allowing a sensible amount to cover their costs: just over £44,000 a year, which would buy an above average quality stay anywhere in the UK.
Do the maths, and the prospect for some is that they will actually end up owning more at death than they do at retirement.
So what does this say about wealthier retirees and, equally importantly, those that advise them?For one, it’s actually very hard for anyone – even a seasoned IFA – to work out exactly how the finances of an individual or even a couple will fare 20, 30 or 40 years down the line: there are simply too many factors to take into account.
And the end result of that is that many will run the risk of scrimping during their 60s and 70s, when they may well have the good health to enjoy the things they saved up for: the long haul holidays or time with their grandchildren. Some may carry on working well beyond when they could actually afford to stop.
If there is a moral to this tale, perhaps it’s this: either the new pensions freedom should lead to simplifying and clarifying our future incomes, and/or advisors and providers should go beyond their current role making sure their clients can enjoy a comfortable lifestyle in retirement. They should help them see exactly what they can expect to live on comfortably for every year for the rest of their lives – and without breaking the bank.
What price pensions freedom if you don’t feel free to live the rest of your life as you’d really love to do?
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong
Countless technology and other companies describe themselves as innovators, disruptors or game changers, or maybe all three, and sometimes that’s true. But none have had quite the disruptive force of COVID-19 which has flipped work and life habits upside down and sucked so much oxygen out of the global economy. The impact will be lasting: many of those new habits are here to stay.
Yet, while a recalibration of lifestyles and business processes is perhaps overdue – and to be embraced given it’s happening anyway – the change presents huge challenges for startups and new businesses that were on a growth trajectory prior to the pandemic. Few would deny that opportunities exist amid the disruption, but the challenge right now is to survive the crisis intact.
The global economy this year will see its biggest contraction in decades. The World Bank projects global gross domestic product to fall by 5.2% this year, with advanced economies shrinking 7% and emerging economies 2.5%. It forecast East Asia and the Pacific to grow just 0.5% this year, down from 5.9% last year. These forecasts assume the markets will return to somewhere near normality during the second half of the year.
Despite all the economic murk and gloom, there are signs that a post-COVID bounce is likely. The World Bank predicts economic growth of 6.6% in East Asia and the Pacific in 2021.
Some business sectors fare better
Looking around, it’s reasonable to anticipate a relatively speedy recovery. In a few business sectors, such as healthcare and telemedicine, e-commerce, fintech, home delivery and food retail sectors, there are companies that have fared better. In some instances, the situation has been transformational in a positive way.
In fintech, for example, global investment actually rose year-on-year in the first half of 2020, according to Accenture, up 3.8% to US$23.1 billion from US$22.3 billion, albeit with the help of COVID-related government loans in some markets. Asia-Pacific saw a sharp rise driven by China and Australia. In the first half, China’s fintech market grew 177% year-on-year to US$2.3 billion, while Australia’s grew 189% to US$1.2 billion.
Resilience is clear to see, but businesses face huge challenges. From a startup perspective, within weeks of the COVID-19 outbreak, many companies went from being solid-growth enterprises, possibly looking to raise money, to ones simply trying to stay afloat.
Debtor books have grown massively as companies stop cash going out the door. Many well-run companies have customers who may not be cancelling, but they are also not paying as fast. For such companies, it becomes a cash issue rather than a fundamental underlying business one. The reality is that businesses are ensuring that every penny going out the door absolutely needs to – so payment terms get stretched. It’s understandable, but it’s problematic if everyone does it.
For startups seeking to work their way onto the fundraising ladder, the process typically starts with an initial pre-seed and/or seed round, which then moves on to Series A to B, C and onwards as needed. The funds usually come from angel investors, accelerators or venture capital firms, in return for an equity stake. Even at the best of times, pitching to get on the first rung of the ladder is perhaps the greatest challenge.
Bar for investment higher as company valuations drop
Advice for many prospects looking at fundraising, certainly during the first wave of COVID-19, was to do nothing except focus on survival. For investors, a business that weaves and navigates its way through the crisis, or even take advantage of the pandemic environment to flourish, is likely to resonate.
Even for those companies that have fared better in recent months, barring an utterly compelling reason to raise funds, now may not be the ideal time. It’s clear that the bar for investment has gone up and company valuations have come down, neither of which is a surprise given higher risk profiles at present.
For companies that are well known to investors, such as Grab, Lu.com, Airwallex or WeLab, fundraising is more manageable. And for slightly smaller but relatively new companies, there are plenty of examples of recent success attracting fresh investment, often through existing investors.
But for smaller, newer companies, not being able to do face-to-face pitches creates much more of a challenge – after all, most funds like a boots-on-the-ground physical interaction before putting money in, particularly if the sums are large.
Despite all that, for new businesses planning to seek funds down the line, there is no harm warming up investors. Having the right conversations now makes sense and would help a startup to hit the ground running when the pandemic abates. The conversations should include ones with government funding organisations. For an investor, matching government funding is attractive because of the higher startup success rate.
Pandemic drives consumers and businesses online
Thanks to the pandemic, people are now far more willing to go online for all manner of transactions. Working remotely from the office is now commonplace, with work hours more flexible.
This trend among consumers, healthcare professionals and office workers has become more entrenched – more retailers are going online, while companies rethink their office space needs. This extends to investors, many of whom initially sat on their hands expecting COVID-19 to quickly pass by. They quickly adapted when it became clear coronavirus was going nowhere fast.
Quantitative easing and low interest rate policies by central banks, along with a boom driven by the lockdown – appetite for online entertainment, financial services, communications, healthcare, shopping, etc. – spurred fresh demand for tech products, pushing share prices rising to record highs. This created an attractive environment for investors to seek fresh investment opportunities.
A consequence of widespread digitalisation is that software, e-commerce and, more broadly, digital startups have an advantage in the competition for funding. An ability to do business both face-to-face and remotely makes such businesses less vulnerable to other trade pitfalls and therefore more attractive for investors.
Conversely, it’s harder for hardware startups at a time when global trade is weakening. They have to consider whether production costs and the markets they promote will be affected by such issues as tariffs or people flow. This type of startup is likely to have access to fewer financing opportunities.
It may seem obvious, but it’s of paramount importance for startups seeking funding to be clear about what they are looking for from investors. Are they simply injecting capital as a passive investment hoping for a return, or are they looking to create synergies to help develop the business? Startups should consider what resources investors can bring to the business besides capital.
These are testing times. However, founders of startups need to stay positive and true to their mission and vision, and why they started the companies in the first place. After all, that’s their value proposition.
COVID-19 and PCL property – a market on the rise?
By Alpa Bhakta, CEO of Butterfield Mortgages Limited
Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.
Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.
Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.
However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.
Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.
However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.
Investors are flocking to PCL opportunities
The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.
Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.
Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.
So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.
Remote working and PCL
On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.
While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.
Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.
A busy few months
Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.
In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.
Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
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