With pension reform drawing nearer, the Association of Investment Companies (AIC) has collated comment from financial advisers on what the Chancellor’s changes mean for the advice market and for retirees, and the role for investment companies in this.
A paradigm shift
Dr Robin Keyte, Director, KEYTE Chartered Financial Planners, said: “The pension reforms represent a paradigm shift in pension legislation, passing more control over to consumers. One outcome may be the increased use of self-investing personal pensions (SIPPs) which means more pension funds potentially able to invest in investment companies.”
“Whilst the Retail Distribution Review has led to a reduction in ongoing charges figures for OEICs and unit trusts, typically from 1.60% pa down to 0.80% pa, in many cases investment companies offer actively managed fund options with lower ongoing charges. Anything that helps to limit the reduction in yield associated with charges will probably lead to a larger pension fund being available at retirement.”
More interest in pensions
James Pigott, Managing Director, Pigotts Investments Ltd, said: “The pension reforms are very long awaited and now, with more options open to investors, pensions have taken a priority position in the minds of investors. The fact that they can be used efficiently for inheritance purposes is great, but certainly moves in the opposite direction from the initial announcement that allowed investors to bust pensions by withdrawing all the funds. I am seeing more interest in adding to pensions since the announcements. More freedom, along with a sensible plan, is always welcome.”
“Just the ticket”
Francis Klonowski, from Klonowski & Co, said: “The Budget headline-grabber was that people over 55 would no longer have to buy an annuity with their pension fund. The problem was always that if you wanted to leave the fund invested and draw from it over time (income drawdown), you had to accept investment risk, with the possibility of seeing your income fall if investment returns didn’t keep up to your withdrawals. This in turn meant you needed a reasonable size fund, generally thought to be around £200,000 minimum. If anyone needed a certain level of income (and couldn’t take the risk of that income falling) then the only option was to buy an annuity, giving them an income for life. While it is good to have more flexibility, the question for most people will remain the same: How can I make this fund last while providing me with the income I need?
“As advisers, we can’t do anything for those people who are just waiting to withdraw their whole fund and do something else with it. For those who are serious about treating their pension fund for the purpose for which it was originally designed, i.e. the provision of retirement income, there will be even more need to have a carefully designed investment approach. A diversified portfolio of mainstream investment companies, with their strong performance record and low annual costs, could be just the ticket to a long and happy retirement.”
Investment companies – a high yield and product development
Gavin Haynes, Managing Director, Whitechurch Securities Ltd, said: “I believe that there is scope to use investment companies to generate a high yield for those individuals who want to maximise their retirement income without taking an annuity. Equity income trusts with a strong record of dividend growth will be sought after.
“I would expect to see product development of closed-ended funds become focused on creating solutions that have the ability to provide a sustainable income for an individual’s retirement needs.”
Anna Sofat, Managing Director, Addidi Wealth Ltd, said: “On balance, the pension reforms are good. Flexibility and ability to use funds as needed is an important component of any retirement planning. What we are now going to need are tools and investment propositions which can help people to secure an income stream in retirement. The investment company structure can lend itself to long-term income generation. The key is that the objectives need to be clear and any use of gearing and derivatives are tightly managed and plainly explained to clients.”
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