Investment and Retirement Planning

We advise individuals from all backgrounds on how to plan effectively for retirement and beyond. The following outlines our general approach.

Planning for retirement

To an extent, although we sometimes choose to ignore the reality, most of us are involved in planning a retirement or exit strategy of some kind from the day we start working even if the degree of planning varies widely from one individual to the next. At one end of the scale, there are those of us who recognise that retirement will happen at some point but who have only some vague hope that when the time comes, there will be enough money in the pot to survive.

At the other end of the scale, we have met clients who present us with spreadsheet-driven detailed income and expenditure forecasts, many years into the future! Such individuals often take assiduous steps to ensure that they start saving prudently, as early as possible, across a range of investment vehicles, ensuring as far as possible that they successfully build up a range of nest eggs, in pension and non-pension form, to provide for a comfortable retirement. Satisfactory retirement exit routes can obviously be engineered in a number of ways e.g. by selling a successful business or simply by dint of a successful and well rewarded career.

In general, the further away from retirement you are, the less note you are likely to take of its financial consequences. Although most people come to recognise at some point the need to save for retirement (i.e. to defer current expenditure), there is often resistance to adopting a prudent financial course of action if this is regarded as impinging unduly on current expenditure habits! In practice, there are always conflicting demands on limited financial resources and the reality is that for the majority, regardless of income bracket, the needs of the present always appear more pressing (as indeed they often are) and are inclined to take priority over retirement needs.

"The future will take care of itself"

Well it might, for a lucky few - it won’t for the majority, at least not without some planning. Those who are fortunate enough to be able to rely on significant family inheritances down the line may be able to take a more sanguine view about their long term financial needs. Lottery winners will be similarly removed from the process of needing to plan for retirement. However, neither of these eventualities offers a reliable basis for excusing the need to plan.

Furthermore, to make matters more difficult, the pensions environment has become seemingly less reliable as of late. The ability and desire of the State to meet its (limited) State pension obligations into the future is frequently called into question. Reliance on the State, therefore, to provide anything other than a basic subsistence level of income in retirement, would perhaps be unwise. At the same time, the days of long serving company employees, enjoying the luxury of a pension of two-thirds of final salary after 40 years service with the same company, seem long gone.

Frequent job changes, the proliferation of self-employment and increasing reliance on a money purchase (rather than final salary) private pension scheme model, place pressure inexorably on the individual (rather than the employer) to fund a greater share of his/her retirement needs out of personal resources. The paternalism practiced by old-fashioned employers now seems very much associated with a bygone era.

The increasing reliance on money purchase pension schemes, themselves hostage to the fortunes of the investment and annuity markets, poses its own set of questions. Annuities now deliver half the pension per pound of accumulated pension fund size, compared to the early 1990’s. Predicting annuity rates years into the future is little more than guesswork. Furthermore, investment lead money purchase benefits, like all investments, require monitoring and, potentially, managing to ensure that the right quality of underlying investment management is obtained, delivering appropriate asset allocation, at the right price. Whether you are an employee or are self-employed, the effective management of your money purchase pension arrangements is extremely important and will require periodic attention.

What do we perceive the role of IAS to be in the retirement planning process?

Our starting point will always be to see what you have built up to date by way of pensions and other savings and we will advise you of any obvious financial sins of commission or ommision! We will discuss with you your objectives and will look at your current position to see if those objectives are attainable, based on the status quo being maintained into the future. Occasionally, what we have to say may be unpalatable - some of our client's stated aims and objectives do not always square comfortably with their current financial position and spending patterns!

Secondly, where appropriate, we will establish with you a broad savings strategy that you are comfortable with, going forward, encompassing quite possibly a range of potential investment vehicles, including deposit funds, national savings, pensions, ISAs, unit trusts, OEICs and investment trusts. The strategy must be both realistic and completely flexible in the sense that it must take account of your prevailing financial commitments and must also be capable of change, should your circumstances change. This process will include making specific pension and investment recommendations and implementing these on your behalf, where appropriate. Our role, as ever, is to ensure that we secure value for money when arranging pensions or other investments on your behalf.

Finally, subject to costs, we will review your affairs periodically (as agreed with you) to keep you up to date with the performance and values of your various pension and non-pension investments and to tweak recommendations, where necessary.

Specific pension advisory services

The IAS partners have wide ranging experience of pension planning issues. This can be split between the areas of occupational pensions (for employee/director company pension scheme members) and retirement annuities/personal pensions (for the self-employed and those in non-pensionable employment).

Occupational pensions advice

This would include the following:

• Advising on the application of Inland Revenue rules, for example, how these govern the funding of maximum approvable benefits, especially tax-free lump sum benefits on retirement (both at normal retirement and on early retirement).
  
  
• Advising on the selection, implementation and administration of money purchase schemes for senior executives/directors, including advice on funding (taking account of previously earned retained benefits, where appropriate).
  
  
• Advising on the pension issues arising on changing employment. This includes advising on the merits of transferring deferred pension benefits (both final salary and money purchase) into a "Section 32" or "Personal Pension" policy.
  
  
• Advising in situations of redundancy on the merits (or otherwise) of redirecting the taxable part of a termination payment into the pension scheme to provide enhanced pension benefits (often referred to pension augmentation). The merit of going down this route in such circumstances is dependent on a number of factors and requires careful consideration.

Personal pensions advice

This would include the following:

• Advising on your existing portfolio of personal pension (including "old-style" retirement annuity policies). This will include an examination of charges, performance and overall asset allocation.
  
  
• Advising, where appropriate, on the interaction between personal pensions and retirement annuities.
• Advising on suitable contribution levels, in the light of overall financial position.
  
  
• Advising on suitable policy trusts, where appropriate, to ensure that death benefits (generally amounting to a return of the accumulated fund) are capable of passing to beneficiaries free of tax and without the need to wait for a Grant of Probate.
  
  
• Advising where consolidation of policies may be appropriate, where to do so would bring either cost or investment management advantages.
  
  
• Advising on the merits of Self-invested Personal Pensions (SIPPs) where a greater degree of investment control is required. This would include advising on a suitable SIPP investment shell.

Investment planning

Via a combination of hard work and good fortune, individuals will often accumulate significant funds over the course of their life. This accumulation process may be a slow one - by gradual prudent saving, for example, or may be more sudden - e.g. on redundancy, at retirement, on the sale of a business or an inheritance. However acquired, it is often the case that many individuals feel ill-equipped to cope alone with the question of how to manage this capital effectively, preferring to seek professional advice in this area.

How can an investor judge where to obtain good advice in this area?

Effective investment management from an investor's perspective (as the Unilever/Mercury court case demonstrated) is obviously not just about the delivery of creditable investment performance. It is as much to do with delivering returns in line with the broad expectations of the investor and, importantly, within the risk constraints imposed by the investor. The good advisor, therefore, will explain in detail the risks associated with the various asset classes. He will establish with the client what level of risk he or she is comfortable with and will construct a portfolio of investments to meet this risk profile, in agreement with the client.

For example, it is quite possible that in discussing risk with an advisor, a nervous investor might declare himself unprepared to invest in any class of asset which could fall in nominal value (thereby excluding all equity based investments). We do not see it as our role to change the client's mind - our job is to point out the prospective long term risk to capital in adopting what we might regard to be an overly defensive approach to investment (as we would point out the short term risk in adopting an overly-aggressive approach). We might also point out to the risk-averse client ways he might manage the risk, e.g. perhaps by obtaining stockmarket exposure gradually on a monthly "drip-feed" basis to minimize the risk of getting the investment timing badly wrong. However, ultimately, we respect that it is the client's own temperament (not ours) which determines appropriate risk and, hence, the asset allocation investment parameters.

Unfortunately, questions of risk are not always addressed in as forthright a manner as perhaps they should be and, inevitably perhaps, consumers are encouraged by investment advisors to concentrate on the up-side potential of the stockmarket rather than its bleaker down-side risk.

In our experience, frank discussion concerning the risks of investing in the stockmarket generally results in clients taking a much more cautious approach to equity investment than might typically be recommended by the investment community. Of course, clients would like to be fully invested in the stockmarket if they knew the market was going to rise by 25% in the course of the year. Unfortunately, hindsight knowledge being unavailable, it is the threat of a potential 25% fall which should act as the client focal point and deterrent to over-exposure.

Stockmarket cycles

Increasingly, it seems to us, it is sentiment or "confidence", rational or otherwise, which is the key factor that drives stockmarkets. This fosters an almost casino-like investor mentality when markets are on a roll, followed by a period of burnt fingers and retrenchment when reality intervenes. The recent dotcom/technology boom to bust fever is a prime example of investment fashion overriding sound investment principles. Investment fashion bandwagons, often fuelled by rapacious greed, are a regular feature of investment markets and frequently result in tearful periods of reflection. In the aftermath of a market collapse, as confidence ebbs away, stock market returns will often struggle to match the (risk-free) returns offered by deposit funds. Although markets have a habit of recovering over time, periods of relative stagnation can be long lasting - certainly 5 year periods where cash outperforms equities are not unheard of. However, the empirical evidence in favour of having at least a proportion of assets exposed to the stockmarket is persuasive. The risk, however, should not be understated.

Emperors without clothes?

A question sometimes asked is whether investment advisors can ever reliably add value in the investment management process, given that there would seem to be no effective mechanism for an advisor to pick consistently winning investments, nor for an advisor to predict changes in market sentiment. Advisors are not, it would seem, very good at predicting stockmarket peaks and troughs, and acting in advance for the benefit of clients.

The fact that we are not up there with Hebrew prophets in terms of foresight, does not, in our view warrant this "naked emperor" tag! Our role involves more than just selecting investments for clients. It is as much to do with educating clients on developments in the investment marketplace (which is ever-changing), explaining how to choose appropriate investment products (and to weed out inappropriate ones), how to gain access to those products at low cost, how to use internet based technology effectively (e.g. to obtain on-line valuations and process on-line fund switching), how to and whether or not to take advantage of available investment tax breaks and how best to allocate assets over the different asset classes.

We naturally also hope that in the course of our research and based on our experience, when selecting equity-based funds for clients, we are able to identify those funds and fund management groups which stand as good a chance as any of delivering above average relative performance. However, clients should not (and in the main do not) expect of their investment advisors the gift of second sight!

IAS - the cautious approach

Difficulties and dangers tend to arise when clients look to advisors to make all the decisions for them. In such circumstances, there may be a temptation for advisors to take a less cautious approach to asset allocation than might be warranted by a strict analysis of the client's risk profile, simply because the client has been less than clear on this subject.

Although advisors should take responsibility for selecting underlying portfolio investments, we believe that underlying asset allocation must be a decision for the investor to buy into wholeheartedly. After all, only the client can decide on what % of overall assets he or she is comfortable exposing to the risk of depletion.

Our typical client

A typical IAS client, seeking advice on capital management, has capital between £50,000 and £750,000, and is not a big risk taker.

Asset allocation and equity exposure

As a general rule of thumb, (subject to specific requirements and prevailing market conditions which might dictate otherwise), we are of the view that outside the main residence, aiming to spread investments evenly over the three main asset classes of cash, fixed interest and equities, provides most clients with a reasonable balance of risk. There is always room for judgmental differences of opinion in this area - however, we are unconvinced that the majority of investors are necessarily comfortable with a more aggressive equity weighting than this, despite the fact that many portfolios contain equity holdings in one form or another significantly in excess of this proportion.

Once we have discussed risk with the client and have established to what extent the client needs to produce income from the investments, we can begin to shape appropriate recommendations. The IAS approach will involve consideration under the following headings:

• Independent taxation - the rules governing the independent taxation of husbands and wives make it important for couples to structure investment holdings carefully to ensure that personal allowances are fully utilised and that tax liabilities are minimised. Ensuring investments are held in the "right" spouses name for these purposes is basic planning.
  
  
• Deposit-based funds (recommending appropriate postal, internet-based or other deposit accounts).
  
  
• National Savings products which would include providing comment on the merit of the prevailing fixed rate/index linked certificates, as well as the taxable income producing investments which may be available.
  
  
• ISA planning (including advice on PEP/single company PEP consolidation). Increasingly, this involves looking at the "fund supermarket" approach which affords significant potential administrative advantages. We recommend both equity-based and corporate bond-type funds under this heading.
  
  
• General unit trust, OEIC and investment trust planning, outside the wrapper of an ISA. Based on research we conduct ourselves, we have identified a range of actively managed funds as well as passively managed index trackers that we are happy to recommend for equity/corporate bond exposure.
  
  
• Insurance Bonds, where appropriate.
  
  
• Guaranteed products, where appropriate. We are generally unconvinced that such products, frequently linking the return to the performance of a stockmarket index or indices (with some sort of cap on the downside) add much value from a consumer's perspective.
  
  
• Discrete portfolio management. We will discuss this as an option, for those with an interest in individual stock selection. Although we do not run share portfolios ourselves, we can advise on the pros and cons and can make introductions to third party stockbroking organisations, where appropriate.

We aim at all times is to provide value for money and to ensure that clients understand the cost and risks associated with any particular course of action. This means keeping advice simple and avoiding, in general, the more opaque investment products which have crept into the retail market place (e.g. split-capital investment trusts and the derivative-based "guaranteed" products). In our experience, our approach is one which is well received by clients.