New Thinking on Financial Planning from Old Mutual Wealth by Alex Sullivan

New Thinking on Financial Planning

CONTENTS

DECUMULATION STRATEGIES IN PRACTICE DEFAQTO 5 STAR RATED PROTECTION GIVES YOUR CLIENTS MORE

LEADING OFFSHORE BONDS – A GREAT COMPLEMENT TO PENSIONS

PORTFOLIO TESTING TOOLS

MOST COMPREHENSIVE RANGE OF PENSION WITHDRAWALS

CONSOLIDATE ISAs WITH OTHER PRODUCTS FOR LOWER CHARGES*

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HELPING SAVERS APPRECIATE THE OPPORTUNITIES FOR OFFSHORE INVESTMENTS

HELPING YOU SEE FINANCIAL PLANNING IN A NEW LIGHT

INTERVIEWS

A market-leading range of complementary planning solutions designed to power your financial planning.

Find out how you can power financial planning at: oldmutualwealth.co.uk/powering Your clients’ investments may fall as well as rise in value and they may not get back what they put in. For financial advisers only. *As investment increases across combined value of Old Mutual Wealth products. Our business is registered in England and Wales. Old Mutual Wealth Limited is authorised and regulated by the Financial Conduct Authority with register number 165359. Old Mutual Wealth Life & Pensions Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority with register number 207977. For full company details please visit our website.

IFA Magazine is published by IFA Magazine Publications Limited, The Tobacco Factory, Loft 3, Bristol BS3 1TF Full subscription details and eligibility criteria are available at www.ifamagazine.com ©2016. All rights reserved.

*Your clients’ investments may fall as well as rise in value and they may not get back what they put in.

Telephone: 0117 953 2003 Editor: Michael Wilson, Editor in Chief editor@ifamagazine.com Publishing director: Alex Sullivan alex.sullivan@ifamagazine.com Design: Fanatic Design

May 2016 IFA Magazine

Decumulation strategies in practice

A move to a long-term mind-set is crucial in the new world of pension freedom. Previously, clients were only faced with one question: what level of income they could secure from an annuity. Now they are tackling questions that do not have easy answers such as longevity, spending patterns now and in the future, and what investment terms they expect over a potential 30 year time horizon.

The future of retirement has being drastically redefined since the introduction of pension freedom, and advisers face new and distinct challenges in both the accumulation and decumulation phases. The evolution of the retirement landscape is throwing into sharp relief the idea that the client, not the product, is of upmost important – a premise which advisers have been working with for years. In the rush to understand the options created by pension freedom and choice, and the consequences of those options, advisers are remaining focused on the individual needs of clients despite an increase in the number of products at their disposal. It is not just the products that are changing; the make-up of retirement is also undergoing change. Compared with generations before, today’s new retirees are typically more active, will live longer lives and are likely to work longer and to phase-in their retirement over a longer period, meaning many will continue working part-time for a significant amount of time. Their retirement needs are however, surprisingly similar to that of generations past, in particular to secure an income and not to run out of money, ideally with money left to pass on to their loved ones. Purchasing an annuity may no longer be suitable for those wanting a more flexible retirement with the ability to access their cash; but for many, full income drawdown may not provide enough income stability and they are wary of being exposed to the ravages of the stockmarket.

IFA Magazine May 2016

This leaves clients and advisers looking at the middle ground between the two, where an array of products has sprung up. It is now the adviser’s job to help their clients navigate this baffling new world of retirement options, balancing the need for income with the desire for flexible access. At the same time, as income needs differ among clients, the reliance of some drawdown products on yield is being questioned. Yield is increasingly being seen as an important part of a totalreturn strategy, rather than an end in itself, with decisions about the level of income required by clients remaining firmly in the advice process. There is only one chance for the retirement journey to be made and it runs a gamut of issues both from a practical planning side and from a human, emotional side. For advisers, the challenge will be to get clients to understand the challenge they face in getting to grips with the nuances of planning for a more flexible retirement, including longevity risk, inflation risk, investment risk and interest rate risk. Clients need to be guided to a place where they feel confident and clued-up on the choices facing them in retirement. Old Mutual Wealth said that the majority of clients are ‘poorly equipped to make choices on their own and it is the job of advisers to delve behind the product to assess their clients’ needs.

‘Financial advisers are increasingly exploring beyond the financial solution and taking account of potential irrational behavioural biases as an important part of their service,’ he said. ‘The way questions and income options are framed with clients is of vital importance.’

Retirement dilemmas Clients find it difficult to articulate exactly what they want their retirement to look like and they have little understanding of how their retirement income can be achieved. Of course, the paradox of the pension freedoms is that it opens up new options for those who are ill-prepared to deal with them and make appropriate decisions. And if they get it wrong, the outcome can be very unfavourable. The issues for clients can be split broadly into three main ‘dilemmas’. The first is ‘now versus the future’ which highlights the conflict between what clients want now and what they want in the future. Behavioural science has proved time and again that individuals would choose a smaller reward that they receive sooner rather than a larger reward that they receive later. Unlocking this behaviour is key to changing the focus on short-term gains - which leads to short-term decision making.

The second issue is getting clients to visualise a long-term plan. This is an enduring problem for advisers as it is difficult for clients to see what their future could look like and how much money they would need to fund it. Research has shown that clients ignore their actual income needs and are more likely to settle for an income and adjust their consumption accordingly rather than adjust their plan. There is also limited understanding during accumulation of how retirement income is achieved and a tendency to defer or ignore retirement planning. This means it is often too late to make any difference to the outcomes by the time a client comes to an adviser for help. The third dilemma is asking clients to think the unthinkable. It’s human nature to put off thinking about unpalatable issues, the ‘what if ’ scenarios. But in order to fund retirement successfully, a frank and honest discussion about the unthinkables is needed. One such unthinkable is longterm care for either

themselves or their families, despite evidence showing that an increasing number of people will need residential care at some point.

Explorer, a sophisticated online tool that is designed to help advisers define and articulate a unique retirement strategy for their clients.

The conversation about what this care may cost is often ignored or deferred, again until it is too late. Unfortunately this problem has also been kicked further down the line by the government, as the recommendations set out by the Dilnot Commission for a care fees cap have been delayed.

The tool can be used to model income and legacy plans in a way that is collaborative and visual so clients can understand the plans fully.

By addressing these dilemmas, the adviser is proving that it is all about the person and not the product, and that a quality conversation with clients can help them plan successfully for their retirement.

Adviser toolkit

The tool provides the following: • Personalised life expectancy • Average life expectancy • Income options compared

Defining an appropriate strategy to meet a client’s retirement incomes needs is arguably one of the hardest parts of an adviser’s planning task. The Old Mutual Wealth Redefining Retirement report showed that the top five outcomes that clients typically want are: • Income that grows in line with inflation • Security of fixed income for the rest of their lives • Protection from falls in value of their investments • Ability to access lump sums when they want • Ability to pass on money to dependants In order to model all of these outcomes correctly, advisers first need to have the right tools at their disposal.

It is not just the products that are changing; the makeup of retirement is also undergoing change.

The Retirement Income Explorer comprises three main elements: a risk profiler, a quick-view option and a fullview option. Each of these allows advisers to create easy-to-understand client reports that use standard or inflationadjusted stochastic modelling.

Old Mutual Wealth offers the Retirement Income

• ‘What if ’ modelling • Income sustainability • ‘Risk of ruin’ probability • State pension • Annuity rate estimations • Over-ride functionality The Retirement Income Explorer can be used at all stages of the advice process to ensure the client is fully informed of their financial plan and to ensure the plan remains on track.

A new type of retirement Modelling a client’s retirement today is more complex than it has ever been, but there are also more opportunities. Gone are the days of a straightforward choice between annuity and drawdown. Clients will often have their wealth in multiple wrappers and not all of their retirement income will come from their pension. They may also look to cash, ISAs, and property to fund retirement. The plethora of wrappers and retirement options mean that advice is more crucial than ever. Old Mutual Wealth’s IncomeSelect proposition enables advisers to create bespoke retirement strategies through a combination of products, managing their assets and income to ensure their desired retirement outcome is delivered and that they fully benefit from the new pension freedoms.

May 2016 IFA Magazine

IncomeSelect is made up of three parts, the first of which is the Retirement Income Explorer tool. Once a client’s financial plan has been modelled through the tools available, advisers can then make use of the Old Mutual Generation Portfolios - three multi-asset portfolios targeting UK Consumer Price Index (CPI) plus.

Actively managing short-term risk limits the risk that a poor sequence of returns could permanently impact a clients’ capital. The portfolio managers are able to act quickly to guard against losses in periods of market turbulence and the diversified nature of the uncorrelated portfolios also aims to mitigate the risks of capital erosion.

1. Old Mutual Generation Target 3 targeting CPI +3% over the medium term

The funds allocate across a variety of managers and a wide array of asset classes, providing exposure to multiple regions, sectors and management styles. All positions are monitored with an eye on the interaction between the funds held, to ensure an appropriate blend is maintained.

2. Old Mutual Generation Target 4 targeting CPI +4% over the medium term 3. Old Mutual Generation Target 5 targeting CPI +5% over the medium term The objective of the portfolios is to meet the needs of a new generation of retirees who desire a flexible and bespoke solution. The Generation Portfolios enable clients to draw down their pension savings while remaining invested in the market. The portfolios, which were developed in collaboration with advisers, look to beat inflation and offer potential capital growth while seeking to cushion the impact of market falls through a focus on short-term risk management. This balance between yield and capital growth sets the portfolios apart from other retirement options available where a choice between ‘income’ or ‘growth’ has to be made. The portfolios also try to protect against one of retirees’ main concerns: inflation. Staying invested via the portfolios allows clients the option of buying an annuity in the future and also allows them to leave some or all of their pension savings to loved ones if they wish to. They can be used alongside other solutions for retirement, such as annuities, or as a standalone option. They can also be used across a range of investment wrappers, including ISAs and SIPPs.

How the portfolios are managed Active short-term risk management is the core of the investment philosophy and investment process, a process which is applied with the pension landscape in mind. 6

IFA Magazine May 2016

The portfolios also have a core of directly invested equities, which offer potential for growth and income. There are four main layers of the investment process for the Generation Portfolios to ensure they are robust. The managers devote significant resources to making long-term, strategic decisions about which types and what exact quantities of the assets available should be held within the portfolios. The process involves the use of proprietary investment models and analytical tools, as well as manager experience and knowledge of macroeconomics and markets from internal and external resources. This enables the portfolio managers to establish trends and locate investment opportunities. The four main parts of the process are: 1. Fund manager research The portfolio managers scour the world for the funds that appear bestplaced to take advantage of market and macroeconomic trends. This process takes into account expected return, volatility, and level of correlation of assets. It also involves analysing the performance, process and philosophy of the underlying managers, as well as looking at the capacity of their organisations and resources to help them outperform markets. 2. Yield assets The portfolios target selected assets with a natural yield. The core of directly invested equities has a bias towards diversified sources of income and solid enterprises with attractive yields. Here yield is utilised as part of a broader focus on total return, by dampening volatility, rather than as an income source. There is also a wider emphasis

on the execution of investments, as well as leveraging the expertise of Old Mutual Global Investors’ stockpickers.

‘This is essential because we know the market does not always reward all styles, all of the time,’ said Gillham.

3. Vigilance on downside risks In the short-term, allocation of assets by the portfolio managers focuses on avoiding the risk of losses and watching out for near-term catalysts. This is aimed at downside cushioning and ‘journey’ risk.

‘While cheap stocks should outperform expensive ones over the longer term, there are some periods when cheap stocks just get cheaper. So diversifying across styles is clearly important to avoid possible instability in a portfolio, with downside risks when the market frowns on particular styles.’

4. The importance of diversification The managers seek to instil genuine diversification into the portfolios, as this is essential for the creation of robust and stable investment strategies. Anthony Gillham, manager of the Old Mutual Generation Portfolios, said the constant pension tinkering can seem bewildering but there are some constants in retirement planning. ‘Among these are three attributes to those investments into which people pour their retirement savings that fund managers should strive to achieve: consistent performance; some downside cushioning where possible; and greater diversification,’ he said. ‘Together they should help mitigate any negative sequence of returns that permanently dents the capital of retirees or those approaching retirement. The first two of these characteristics are in many ways a function of the third: a genuinely diversified portfolio should generate smoother returns and help shield performance during moments of market stress.’ In order to work to this mandate, Gillham said the multi-asset unit at Old Mutual Wealth’s investment division picks a mix of assets that ‘exhibit low levels of correlation with each other’ such as equities and bonds, which protects retirement savings long term. ‘A diverse range of investments should enable the Portfolios to even out some of the peaks and troughs of the markets,’ he said. ‘This has a beneficial impact on retirement savings, because relatively smaller but more consistent investment returns tend to result in superior returns over the longer term. By contrast, larger moves up followed by smaller moves down tend to lead to inferior returns.’ Being multi-asset, the Portfolios allocate to a broad range of fund managers, which means investments cross different fund management styles, as well as multiple regions, financial assets and industrial sectors.

Further diversification is created at the level of security selection, by ensuring diversification within asset classes. ‘Finding securities that help provide an income is key to building portfolios for retirement. Certain stocks that have a long history of paying out much of their earnings to investors are often favoured,’ said Gillham. ‘Before the financial crisis, shares in UK banks were a favourite to meet this challenge. However, having too great an exposure to these stocks would have wrought havoc on a portfolio during the financial crisis. Banks’ share prices were battered, while the only payouts a number of the largest went on to make were to the Government which had been forced to bail them out.’ So it follows that diversification is essential to craft the right retirement portfolio. Gillham and his team also use a tool that takes forward-looking estimates for risk, return and correlation during the strategic asset allocation process. This produces thousands of trial portfolios and helps avoid ‘tippy’ portfolios – situations where small changes to input assumptions lead to wild variations in the outcomes. Testing and changing these inputs very slightly thousands of times means an average asset allocation can be taken and a more stable and robust portfolio created.

Diversification is essential to craft the right retirement portfolio

This strategy can be adjusted and re-adjusted to fit the changing landscape of financial markets. ‘It is worth remembering one thing: the creation of portfolios for retirement requires diversification at every stage of the investment process; or more simply, the blend is your friend,’ said Gillham. May 2016 IFA Magazine

Testing the Portfolios

and sometimes further out depending on the market.

The investment process not only relies on the experience and knowledge of the Old Mutual Global Investors investment team in managing equities, fixed income and multi-asset funds, as well as other asset classes such as alternatives, it also requires the use of a series of tools and models.

Cushion for loss characteristics. The stress tests are executed using expected risk, return and correlation data.

MCMVO

(Monte Carlo Mean Variance Optimisation) This tool is part of the strategic asset allocation process. Its job is to take forward-looking estimates for risk, return and correlation and produce thousands of trial portfolios. The MCMVO is the mechanism that helps avoid ‘tippy’ portfolios – as discussed earlier – where small changes to input assumptions lead to wild variations in the outcomes. To provide an example of this, a change of just 30bps in the relative return between UK fixed income and cash has in the past triggered a shift of more than 30% in the allocation between the two asset classes in a normal mean variance optimisation process. Testing and retesting inputs and changing them marginally, thousands of times, allows for an average asset allocation to be taken as a result.

Stochastic model for stresstesting asset allocation Stochastic modelling allows the management team to randomise hundreds of different potential scenarios. This allows the team to construct robust portfolios with respect to drawdown, based on expected future asset class 8

IFA Magazine May 2016

The aim of stochastic modelling is not to change the asset allocation within the portfolio but to see what would happen under different scenarios over different time periods. This tool allows the team to see whether it has designed an asset allocation that actually looks good from a total return perspective, but see if it has opened the portfolios up to big drawdowns. If necessary, the allocation can be tweaked to find the best mix of assets in a portfolio that sits within risk bands, giving a long-term total return target that does not compromise the ability to be careful about short-term drawdown risk.

V-TEC

(Valuation, Technicals, Economics, and Corporate activity) As part of tactical asset allocation, this tool generates overall scores for assets or markets. It looks at valuations across worldwide markets while taking account of technical factors such as liquidity, macroeconomics, growth and inflation data, and corporate activity like mergers and acquisitions.

This tool is crucial as it tells the team how much a bond’s yield can rise before losses are suffered. It assesses the ‘carry and roll’ available. Carry is in the income that the security pays out, while rolldown is the capital gain investors accrue from an upward sloping yield curve. Take a 10-year bond for example, when a 10-year bond becomes a nineyear bond, ‘rolling down the yield curve’ results in a drop in yields and a rise in price. It follows that path even if interest rates and bond yields rise, as they would have to rise above a certain threshold before investors lose money on bonds. That level can be higher than might be expected, for example, a three-year Australian government bond could offer enough carry and roll to mean yields would need to rise by 50bps before money would be lost. This information allows the manager to target duration, or interest-rate sensitivity, on the most attractive part of the curve.

VAGRA

Wingman

(Value and Growth Analyser)

This is a tool designed by Lee FreemanShor, manager of the Old Mutual Global Best Ideas and Old Mutual European Best Ideas funds.

VAGRA looks at equity indices and the managers’ portfolios to help understand their value and growth characteristics. This enables the multi-asset team to target investment exposure better, as they can look at valuations globally using a large number of metrics, including priceto-earnings or price-to-book.

The tool is based on the investment philosophy outlined in his book The Art of Execution. It analyses portfolio holdings and triggers action when a position is turning sour; for example, when a stock is materially down. Freeman-Shor’s research suggests that inaction is far worse than action in these circumstances and that ‘winners’ adapt either by doubling up or exiting positions. The Wingman tool helps to identify these situations and issues a call to action.

It can also drill down into different segments of different markets, for example European large-cap or US or small-cap equities, to understand where the best earnings-per-share growth is to be found.

RAYCAP

(Rates and Yield Curve Analysis Package) This tool helps the multi-asset team to find mispriced bonds, by allowing the team to infer what the market is factoring in at various points on the yield curve about interest rates. Using the tool, the team can input interest rate predictions into the first three years of a yield curve for years three-to-five, five-to-10 and 10-to-30,

The model then calculates the relationship between the different bonds along the curve. This enables the team to draw conclusions about market expectations of future policy rates and the pricing of different yield slopes, for example, between a five-year and a 20-year government bond. The model also allows regression of relationships between different countries, such as comparing 10-year US bonds with the equivalent maturity in the UK, so the team could go long 10-year US Treasuries and short UK Gilts through a derivatives trade if the relationship was expected to change. The RAYCAP tool essentially allows the multi-asset team to understand what the bond markets are saying.

Units of risk This tool effectively works as a ‘risk budgeter’ that allows the managers to understand where they are taking tracking errors versus benchmarks in terms of the positions taken around them. It enables the investment team to ensure, if they have decided to take a 5% tracking error via an underweight position in US equities, that they are actually taking that amount of risk. The tool ensures the risks are diversified by showing where any outsized positions may have been taken, helping to smooth the ride for investors and create consistent returns by not putting all their eggs in one basket. This tool works well alongside the Wingman, by enabling the investment team to express positions more uniformly across the portfolio.

Spreads The spreads tool analyses all kinds of credit spread, including US high yield, UK investment grade, European BBBs, and Portuguese government bonds against German Bunds. It tells the team where it can get the most bang for their buck across different credit markets and whether bonds are trading rich or cheap in relation to their history. By adjusting for duration between markets, the team can use the tool for tasks like assessing UK corporate debt bonds versus US credit, even though the duration of the sterling market is a couple of years longer, meaning its bonds would appear cheaper. The modelling of the tool also tells the team how much spread they get per year of duration.

Behaviour and apperception This tool is used to look at how fund managers are trading and learn whether they are actually doing what they say they do. This tool helps the team understand how the managers react when stocks fall, showing whether they are the type of managers who double up in this situation when they still believe in a stock – as set out in Freeman-Shor’s theory. Moreover, it helps demonstrate whether they execute properly, as execution is very important in adding value. If a stock is up by 100%, is the fund manager trimming their position? And if something is up by 100%, are they taking profits too early?

May 2016 IFA Magazine

Withdrawing income Retirement today is more than just pensions and more than just annuities. Providers need to reflect this change. Platform technology can provide advisers with ways to invest and manage a client’s portfolio within a range of wrappers and also to extract capital along the retirement journey – crucially at no additional cost. Old Mutual Wealth offers a range of solutions for clients, underpinned by a robust offering that has a single, transparent charge that is easy for clients to understand. As there are no additional charges for switching or taking drawdown, costs do not affect investment decisions. These wrappers are available – grouped according to the income options they provide: • ISA • ISA (formerly PEP) • Collective Investment Account • Collective Investment Bond (onshore) These options offer income withdrawal as a percentage or set sum, either monthly or a specified frequency, with

income increases of 5% or Retail Price Index (RPI). • Collective Retirement Account – flexiaccess drawdown (lump sum upfront, regular taxed income) • Collective Retirement Account – drip feed drawdown (tax- free income followed by regular taxed income) • Collective Retirement Account – drip feed drawdown (blended tax-free and regular taxed income) • These options offer income withdrawal as a set sum, monthly (apart from flexiaccess drawdown which is monthly or annually), with income increases as specified on review. The idea of retirement as the end of a working life no longer fits the new world of pensions and phasing in retirement. Retirement is the start of a new phase of life, one which needs careful planning and funding in order for it to be as fulfilling as the client, and the adviser, hope it will be.

Landscape of retirement Retirement is undergoing radical change and there is a wealth of opportunities for advisers and for clients.

Last year, Old Mutual Wealth commissioned YouGov (Old Mutual Wealth Redefining Retirement report) to survey over 1600 adults on their thoughts on retirement and financial advice. The results, released in September 2015 bear out Old Mutual Wealth’s belief that advice is crucial. It shows that 90% of people who see a financial adviser on a regular basis feel the advice has benefited them, with peace of mind seen as the most important benefit, ahead of financial benefits that may be gained – and which can be substantial. The Redefining Retirement report also revealed that those who do not take advice have an average annual retirement income of £18,138 compared with an average of £24,794 for those who do take advice. However, the income can be boosted further, to an average of £27,736, for those who have advice and a set target for their retirement. When asked about the future of the retirement market consumers are uncertain, and with myriad changes to pensions, allowances, and the future of tax relief looking uncertain it is easy to understand why they feel like that. Constant reform of the pension legislation has put people off saving and one in five believe the pension

The managers There are two managers in charge of the Generation Portfolios who have many years of investment experience between them. Anthony Gillham has over 15 years of experience. He is co-investment director of the multi-asset unit and joined Old Mutual in 2000. In 2007, Gillham became a global bond portfolio manager, after being a fixed income research analyst since 2006. Prior to focusing on fixed income, Gillham’s areas of coverage included multi-asset, Nordic equities and quantitative US equity and fixed income research. Gillham is a CFA Charterholder and holds the Investment Management Certificate. Paul Craig is manager of the Cirilium multi-asset portfolios and a member of the multi-asset team. He joined in December

IFA Magazine May 2016

2014 following Old Mutual Global Investors’ acquisition of Cirilium. Craig has managed the Cirilium portfolios since 2009, taking on these responsibilities shortly after the inception of the range. Both managers have complementary skills that ensure the Generation Portfolios function as they are supposed to. Gillham brings the models and tools he has used and developed for investment analysis while Craig comes with a wealth of experience in running multi-asset solutions, especially in dealing with the niche areas of financial markets that are key to the construction of the Generation Portfolios. They also utilise the skills, knowledge and expertise of the wide multi-asset team.

freedoms will be reversed, and a third think tax relief available on contributions will reduce. Another 15% believe the lifetime allowance will be reduced further and only 12% said there will be no major rule changes. However, this uncertainty also creates opportunities for advisers to help clients work through the changes and put in place a plan that will help deliver on the desired outcomes with enough flexibility for future changes to be accommodated. Adrian Walker, retirement planning expert at Old Mutual Wealth, said while awareness of pension freedoms was high, understanding of the impact was ‘relatively low’. ‘The whole concept and image of retirement is changed forever, with less than one in five of us now retiring based purely on our age. The state pension is less of a finish line now, and more of a reminder that there are key decisions that need to be addressed before then if individuals’ retirement aspirations are to be achieved,’ he said. A new type of retirement is opening up, and advisers can be there to help fill the gaps in understanding and income. Walker said people now want to enjoy a ‘second life’ rather than a retirement. ‘We can see the new flexibilities leading to an increased number of people in their later years starting new careers or even new businesses – this trend already being evident in the number of new businesses set up by the over 50 age group,’ he said. ‘As needs, demands and options change, it is more critical than ever that those thinking about how to apply their savings to meet their future income needs seek education and, where necessary, advice. The value in that advice is not necessarily purely financial, but it can help establish a plan to ensure that whatever vision of a redefined retirement a person has, they have the best chance of attaining it.’

As retirement evolves, the advice given and the retirement solutions that are used will also evolve. Advisers are best placed to help steer clients on the right course, helping them to make the most of pension freedoms and to achieve their goals of stable income and flexibility, as well as helping them fund life events and leave money to loved ones. Advisers must work with providers and retirement solutions that are adapting to this new world to enable the best outcomes for their clients. The idea of retirement as the end of a working life no longer fits the new world of pensions and phased-in retirement. Retirement is the start of a new chapter of life, one which needs careful planning and funding in order for it to be as fulfilling as the client, and the adviser, hope it will be.

As retirement evolves, the advice given and the retirement solutions that are used will also evolve.

*Your clients’ investments may fall as well as rise in value and they may not get back what they put in This document is based on Old Mutual Wealth’s interpretation of the law and HM Revenue and Customs practice as at May 2016. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change. The value of any tax relief will depend on the investor’s individual circumstances. May 2016 IFA Magazine

Helping savers appreciate the opportunities for Offshore investments Anyone would be forgiven for thinking that investing offshore nowadays is akin to making a pact with the Devil. Advisers know that offshore has its role to play in any well-conceived and properly planned investment strategy. However, clients are becoming increasingly dazzled with headlines about colourful celebrities using offshore schemes as part of illegal tax evasion schemes. So how does an adviser cope with this increasingly challenging situation? For many advisers, the very mention of the word Offshore has their clients in a mild state of panic, and given some of the recent stories in the media, understandably so. When you get the country’s two most powerful politicians – Prime Minister David Cameron and Chancellor George Osborne – threatening to come down heavily on those individuals and companies who do use offshore schemes to avoid tax, then it’s easy to see where the confusion comes from. However, clients need to be reassured that offshore strategies, properly structured and regulated, are a perfectly legal and viable part of many investment portfolios. Within this supplement, the interview with Tom Hawkins, Head of UK Proposition Marketing at Old Mutual Wealth, highlights the fact that Offshore represents a great opportunity for advisers and investors following the recent changes to UK pensions. As he comments: “We want to make sure that advisers continue to recognise offshore as being a suitable place for their UK clients to invest in for the medium to long term. We are, at a time when others are pulling out of that market, giving advisers the

IFA Magazine May 2016

right products and the right solutions to maximise tax efficiency.”

marketing collateral that advisers can use with their clients.”

Supporting advisers

He added: “Ultimately, it’s that tax efficiency on the way in and also on the way out that will help clients achieve their financial planning goals more effectively.” Advisers are not alone when

The driver for Hawkins and his colleagues at Old Mutual Wealth, is how best to help advisers get that message across to their clients. The answer is by using number of approaches: “We provide the tools, the products and solutions to equip advisers to deliver sound and appropriate recommendations backed up by the right reasons.

Redefining Retirement It’s about the person not the product Let’s face it. Pensions have suffered from a relatively poor media image in recent years. How many times have you heard clients say things like “my business is my pension” or “I’d prefer to invest in property than a pension”? Pensions have managed to switch people off saving for their retirement. Added to this, numerous studies have told us that large numbers of consumers are not saving sufficiently to fund the standard of living in retirement that they require. This ticking time bomb is likely to cause significant problems in years to come. For advisers, the first challenge of the financial planning process is to get clients to a place where they feel competent to understand the choices facing them. It’s about ensuring that clients are confident that they have appropriate plans and strategies in place to live the life they wish to lead both now and in the future– regardless of their age or at what stage of life they are at. Planning for retirement is one of the most important of these strategies.

comparison, ISAs do not seem to suffer from this same problem. However the new world of pension freedoms is bringing a much needed positive boost for pensions. It is generating wider opportunities for advice professionals to deliver a more finely tuned client proposition. It also introduces new elements to the factfinding process. For example, it is crucial for advisers to ensure that clients are holding plans which offer flexi-access drawdown to them and their beneficiaries (which can be defined as dependants plus nominees). Not all contracts have such flexibility and unfortunately ‘dying in the wrong contract’ is by no means an uncommon circumstance.

Putting the plan together

“When it comes to the positioning of each of the products and solutions, we provide useful client collateral, which provides important detail to inform and also to warn clients where necessary against some of the pitfalls, or just to reassure them that this is a reputable company and to eliminate any fear that might result from media hype around tax evasion. It comes down to having the right product and also the right

discussing subjects as offshore with their clients. Firms like Old Mutual are happy to provide the technical support and the tools needed to show how offshore strategies should never be dismissed out of hand and that, especially when it comes to high net worth individuals, it should continue to feature as a crucial concept within the financial planning process.

For advisers, helping clients to understand the significant tax benefits of pensions as a financial planning tool is a crucial part of the advice process. The fact that pensions are simply a wrapper, a tax efficient way of holding a range of investments, is often not understood by clients, adding to their negative image. By

Unadvised risk – given the range and complexity of the options now available at retirement, the risk for clients acting without professional advice is greater than ever. Investment risk – using pension freedoms and choosing a variable income introduces the need for sustainable investment strategies. This new facility requires new investment solutions. Whilst there is a myriad of funds and portfolios available to advisers, few have been specifically designed to meet the needs of the new generation of retirees who are looking for a flexible and bespoke solution. Old Mutual Global Investors’ Generation Portfolios have been specifically designed to enable clients to draw down from pension savings while remaining invested in markets, via a range of multi-asset portfolios. The portfolios seek to beat inflation and offer the potential for capital growth. At the same time, they aim to mitigate against the impact of market falls through a focus on short-term risk management. This is a powerful combination ideally suited to today’s needs.

Having a plan in place gives great peace of mind to clients, reassuring them that they are on track to achieve their goals in life. It’s also a clear demonstration of the value of advice, supporting the ongoing review process and also the willingness to pay fees for a service which clients can clearly see adds real value to their lives. With a multitude of different products, wrappers, funds and strategies to choose from it is essential that these are properly researched and new developments fully considered in order to make recommendations which are in line with clients’ needs. Diversification is key to this.

Inflation risk - clients find it hard to envisage how much money they will need to sustain their required lifestyle in retirement. Breaking down costs into manageable categories and running a thorough a detailed cash flow model will help with this.

What about risk? To help clients make the psychological adjustment to the new way of planning for retirement, it is important for advisers to frame client conversations around key risks to shape a bespoke retirement strategy. These risks are as follows: Longevity risk - most individuals underestimate how long they may live. This can present a problem with them running out of money too soon. To minimise this risk, many advisers now use a projected life expectancy of 100 when doing cash flow forecasts.

Compared with previous generations, clients are now typically more active, living longer, and with a baby boomer’s desire for personal fulfilment. However, their financial needs and attitudes are the same as before when planning for their retirement: a decent level of income, the desire not to run out of money and ideally something left to pass on. Within the new world of pension freedoms, there’s never been a better time for advisers to help their clients to live the life they want in retirement with the peace of mind that comes from having a sound financial plan in place.

May 2016 IFA Magazine

Don’t forget the basics Argues Tom Hawkins - and that includes protection and offshore investment serious accidents and advance payments for surgery.

Tom Hawkins, Head of UK Proposition Marketing at Old Mutual Wealth, believes that when it comes to the financial planning process, protection has to come first. This is the vital building block for every adviser and their client. As well as talking about protection, he also took Neil Martin through the reasons why offshore remains a key investment opportunity, despite it being less popular than it once was. From the very first conversation an adviser has with a client to create a personal financial plan, their needs for protection should be one of the first elements to be reviewed and discussed. And that means making sure the client has contingency plans in place to protect them in case of unforeseen circumstances. Plans are important but the right coverage of products is too, from life cover to critical illness cover. He made the point that it’s not just a case of ticking boxes, but taking a close look at what the chosen product actually covers. When it comes to Old Mutual Wealth critical illness products for example, it is all about the quality of the cover provided and not just going through the motions. That might mean that the policy, as well as including a large number of definitions, has a breadth of cover that includes such things as 14

IFA Magazine May 2016

Hawkins added: “It’s not just about that claim, the cheque that lands on your mat. It’s about the emotional and practical support that is given as well. Last year we launched a service called There for You, which is available to all clients and their families who set up a Protect policy with us from November 2014, whether they have claimed, or not. For example, it offers practical and emotional support from a qualified nurse, who can help people through difficult times such as a serious illness or bereavement.”

Support Old Mutual Wealth, said Hawkins, provides advisers with the support they need to reassure their clients that they are a firm that can be trusted, and that it has the structures in place to offer a relevant and competitive package of products and services. He highlighted the fact that humans are all too happy to not dwell on the negatives: “People put off the unimaginable and the unpalatable, but the reality is that there are two certainties in life: one’s taxes and one’s death.” Once the protection support has been built in, the adviser can then extend the planning process to broader areas. In particular, tax efficiencies for clients. “That’s where you can move on to using all the tax allowances and tax reliefs available, and that includes consideration of offshore wrappers too.”

Offshore Offshore investing is not currently flavour of the month admitted Hawkins. All the reports in the general media of offshore investments being used by people to avoid tax are concerning clients who wish to avoid being associated with anything they believe involves tax evasion.

Old Mutual Wealth is working alongside advisers, helping them to reassure their clients that offshore investing is a perfectly legal and tax efficient solution which may be appropriate for them. He said: “We want to make sure that advisers continue to recognise offshore as being a suitable place for their UK clients to invest over the medium to long term. At a time when others are pulling out of that market, we are giving advisers the right products and the right solutions to maximise tax efficiency for their clients.” What’s more, Hawkins believes that offshore investment presents many sound opportunities for clients following the recent changes to UK pensions. He believes that the following two key questions need to be taken on board by advisers:

Q1. How can income be taken efficiently in the future (including assignment to non-earners/ lower earners)? A. The best way is by using all the different tax allowances appropriately to deliver optimum tax efficiency.

Q2. How can assets be structured most efficiently for legacy planning? A. This involves the use of flexible and appropriate trusts. Regular savings into an offshore bond could make sense for those clients who have registered their UK pension savings for lifetime allowance (LTA) protection (especially enhanced protection, fixed protection 2012 and 2014, and this year 2016), who can’t fund any more into the UK pension system for fear of losing their LTA protection. Using this route as a mean of building additional retirement savings could also apply to those high earners with an adjusted income above £150,000 this

year. For such individuals their annual allowance for pension savings in the current tax year will be restricted below £40,000, and down to £10,000 for those with an adjusted income of £210,000 plus. They may be able to offset some of the limitation by using unused annual allowances from three previous years, but might have used that up, or much of it at least, and so will need to address the issue of what else they can do either this year, or next, if earnings are continuing at a higher level. A similar position could also apply in situations where clients are taking the view that the current value of their pension savings, projected forward, might be likely to exceed their LTA in the future (from the 2018/19 tax year, this is set to increase by CPI).They may want to discuss with advisers whether they should stop, or reduce future funding through the use of pension schemes for a period. If they take that course of action they will be looking at an alternative to help build retirement savings outside of direct pension savings, at least for a period of time.

Last Word Hawkins finished by saying: “What we’ve tried to get across in this financial planning campaign is that financial planning is the game in town, and more so than ever before. We need to ensure that tax allowances on the way in and on the way out, are being fully utilised in the best possible way by advisers across multiple different product wrappers so that their clients have the best possible chance of achieving their goals, as set out in the financial plan, and of living the life they wish to lead in future.” *Your clients’ investments may fall as well as rise in value and they may not get back what they put in. May 2016 IFA Magazine

It’s the journey that matters, not the destination That’s the view of Danny Knight, a director of the Old Mutual Wealth investment division’s multi-asset unit when discussing the investment options they have packaged for clients, known as income select. Knight describes Old Mutual Wealth as the investment engine within the Old Mutual Group. He and his team firmly believe that an adviser and their clients need something different in decumulation strategies than they can find in those aimed at accumulation. This, he says, is contrary to other organisations which tend to push yieldbased strategies. Knight clarified: “I think there’s more rhetoric and noise coming out from regulatory commentators, saying actually you do need to do something different in decumulation. The risks, the concerns and the outcomes are different, and that’s why I suggest that we are the only group with an investment range specifically designed for this purpose.” He went on to explain that in the accumulation stage clients are aspiring to get the best total return. It’s all about the destination. Whereas when it comes to decumulation: “I suggest that the two things advisers’ clients really care about are: 1. Am I going to get the income I require? 2. Is my capital behaving in a way that I’m comfortable with?”

Paramount Importance It’s a simple case, said Knight, of accumulation being about the destination and decumulation being about the journey. He argues that this is especially important when clients don’t have time on their side. They don’t want to be told it’s a rolling three-year market cycle, and

IFA Magazine May 2016

don’t worry that your capital has fallen and so has your income. “That’s not what clients want, especially when they’ve worked very hard to build up their capital”, asserted Knight. Knight also believes that what clients want is flexibility: “I believe that the mantra of a client seeking a particular yield, or a percentage of their assets as a return, is fictitious. I suggest that most clients, after a consultation with an adviser, will agree upon a level of income that will meet their living requirements, and aspirations, and that’s what they will be seeking to get from their assets, whether they are in pension pots or other assets or wrappers.” The backdrop said Knight is that people are living longer; that in retirement their needs will be different from what was required years ago. Their spending requirements will also change throughout their retirement, whilst their aspirations and health will also be constantly changing. The key thing they will need is flexibility around their income. In other words, it’s not just about being dependent on a particular yield coming from their portfolio.

Key Criteria As for the Old Mutual offering, Knight had this to say about structuring a product that meets all the key criteria: “Okay, a structured product, a guaranteed product and an annuity might be great, but when taking into account inflation over a 20/30 year timeframe, you need to make sure your clients’ real spending power is met, that you’ve got flexibility as well as a reliable income.

“So what we’ve created is three Generation portfolios which aim to generate a total return of CPI plus 3,4, or 5%, net of fund charges. But the key is everything we’re doing is to cushion the journey.” For Knight and his team, they have a different starting point from other investment firms: “We ask the questions ‘how can we create the portfolios, how can we create the asset allocation, how can we create the model?’ These are all about trying to avoid the things that hurt the portfolio in the short term. It is the here and now that really hurts our clients’ income.”

starting point is different, but naturally the ingredients we use are similar; it’s a multi-asset portfolio, fund of funds approach. We do have a direct-equity sleeve around that, so around 20% of the portfolio will be in direct equities. “But, equities in themselves are there to be quite boring. Now I’m not saying that yields are not relevant – we are providing a total return strategy – but we will invest in both alternatives and direct equities that provide a yield, inside the portfolio, to act as dampener. So again, just to try and cushion that journey.” The emphasis for Knight and his team is on short-term risk management – striving to take risk

off the table, when necessary – and giving a CPI plus return whilst protecting on the downside. Knight pointed to the recent market volatility as an example, when the team, whose aim from the Generation portfolios is not to give the best total return, had some 30% of their investment risk off the table from January until early March. This is because market drawdowns have a real material impact upon the capital and can naturally lead to client longevity concerns. Knight returned to his argument over yield: “Equally a lot of people

talk about yield as being the answer. I flip that over to ask: if you look at adviser and platform charges, taxation and, equally, how much risk is being taken on to generate that yield, is that the type of risk that clients want to take with their capital in this space?” He adds: “If we look at those yields, how many clients have accumulated a sufficiently large pension pot that will generate a natural yield to provide the income they need, especially after charges? It is probably far larger than most mass market clients can typically afford. So, we suggest that yield has a place in the portfolio, but it’s not the answer. We firmly believe that providing clients with a portfolio that generates a CPI plus return, that’s focused on giving a more cushioned journey with flexibility to change over time, will effectively meet advisers’ clients’ needs.”

Knight said that the Generation portfolio managers, and their analysts, conduct extensive research to pick the best funds for their clients. They look at total returns, examine various reporting tools, and assume a level of income that can be generated: “Clients need to be reminded that that doesn’t really show what the volatility has been like week to week, month to month, if they are making regular withdrawals.” Equally he reflected that, over the last nine years, markets have been relatively benign, with lower volatility. “So just to rely on looking at how our fund has behaved over the last seven to eight years, and look how it would have performed had you taken a regular income from it, I think would be slightly disingenuous.”

Cushioning the journey As to how products are actually built, Knight is clear on the method: “Everything we are doing is about giving clients that cushioned journey. The May 2016 IFA Magazine

Huge opportunities for financial advisers Maximising pension benefits for clients an interview with Adrian Walker

remember what they did or didn’t do originally, never mind anything else. So it’s really important for them to at least ensure that their scheme has an up-to-date expression of wish, just so that schemes are aware of what their intentions are with regard to the distribution of their pension scheme savings in the event of their death.”

Pre-Planning Adrian Walker, Retirement Planning Manager at Old Mutual Wealth, was adamant about one thing: there are huge opportunities out there at the moment for financial advisers. More than ever before, their ability to step in and help their clients understand the somewhat confusing world of pension savings, especially as regards tax relief and death benefits, is needed. He tells Neil Martin that now is the time that advisers can fully leverage their knowledge and experience to make a real difference to their clients’ lives. Walker stated that the current environment is confusing mainly because, after the budget and into the new tax year, things are not quite where they should be. For some time before the budget, the government and the media were flagging up the likelihood of big changes to the pension tax relief system. As we all know, in the end this did not happen. “I think there is definitely a feeling that there is more to come in terms of the longer term structure of pension tax relief,” explained Walker. “What we reasonably don’t know is what the wider base is going to be of any future change, because at the moment everything else is left untouched. I think there is a general industry feeling that this is not where George Osborne would have preferred to have been after the budget. As a result, we might just see some more movement and signposting on this from the government later in the year, post the BREXIT vote.”

Financial Planning perspective Walker highlighted that from a financial planning perspective, many advisers did a lot of work before the budget on trying to identify those clients 18

IFA Magazine May 2016

who could benefit under the current regime and to encourage them to build up their retirement funds, maximising the benefit from tax relief. The premise being that the system would change after the budget. “At the moment it feels like there is an extension of that opportunity,” added Walker, “so even for those who are affected this year at the top end, that reduction in their annual allowance only applies for this year’s earnings. They still have potential unused allowances for their previous tax years, which could be as much as £40/50k for each of those years. They therefore have a chance, if they didn’t do it fully beforehand, to look at this year as a further opportunity to boost their retirement savings through the use of a pension wrapper with fullon tax relief, in respect of their unused annual allowances.” Along with the industry, Walker suspects that a radical shake-up of pension tax relief is just around the corner, awaiting the outcome of the vote on Europe, and that all things being equal it will re-appear in the autumn. “This is why,” said Walker, “advisers can recognise that there are some big planning opportunities out there at the moment, especially for those clients who are higher rate and additional rate taxpayers, and business owners where pension funding can be made directly from the company. What’s exciting for advisers,” he said,” is that every individual is different, with a different background and different priorities: There are some real opportunities for advisers to actually spell out their expertise as advisers in this area, because they can look at everybody on an individual basis and start to map

a programme out with them, especially when you have things like workplace pensions in place at the moment.” Walker stressed that people need to be made aware of the current dangers of inaction: “It’s a case of the tax-tail wagging the reality-dog, as it were. Understandably, people are frightened about paying tax, but they might end up paying more tax by doing nothing as an alternative. Many people could benefit from the peace of mind of having a review with an adviser and getting a financial plan in place. Once it’s done, they can then look forward to regular reviews to ensure they keep things on track, and make some decisions a bit further down the line, rather than immediately.”

Death Benefits According to Walker, the other big issue around at the moment and which came off the back of the pension freedoms is that of death benefits. This covers the way that money can be passed on via a legacy to beneficiaries and its tax treatment in their hands. Now nominated beneficiaries have other options to consider, because they can receive that money as a tax-free lump sum or opt for another option within the legislation known as beneficiary draw down. The issue is that although there are very flexible options available to beneficiaries within the new legislation, not all pension schemes allow such options. Walker said that advisers must ensure that, as part of the fact-finding process, they find out exactly which pension schemes their clients have in place. It’s essential to know whether these offer full flexibility and also what their instructions were at outset: “A lot of people won’t even

Walker reminded advisers of the need to keep their clients fully up-to-date with their retirement plan, particularly because older pension schemes might not enjoy full flexibility and might not provide them with the full range of options they expect or need. Preplanning for such events is essential, because it cannot be rectified after, say, a death; when the person wanted a certain outcome for their beneficiaries, which subsequently proves not to be possible. The last word goes to Walker: “I would say to advisers that you can’t just ignore it because the person is alive. These things are going to happen and at the very least you need to cover all potential outcomes with clients as part of the planning process. If they choose to go away and think about it, or not take any action, that’s absolutely fine. But as an adviser, you’ll be gathering information from all their schemes anyway. It’s well worth finding out what their options are and see if there is an expression of wish on file somewhere, just to start to get that process moving forward and at least be brought up to speed. It could be the first vital step for achieving the outcome which the client really wants and giving them the peace of mind from knowing what the situation would be with their various pension plans in the event of their death.”

May 2016 IFA Magazine

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