I don’t think anyone, at this point last year, expected the catastrophe that was 2020.
Perhaps that Brexit would go down to the wire – but not covid-19 and the unimaginable toll it has taken on lives and the economy.
But, even with two vaccines being rolled out and a signed Brexit deal, 2021 is likely to be anything but smooth sailing.
Below; Steven Cameron, pensions director at Aegon, highlights topics that could be prominent in the year ahead: including economic recovery, the future of advice, post-Brexit regulation, interest rates and pensions.
Plans for economic recovery – ‘building back better’
The financial markets and the economy took a big hit in 2020 and the costs of the coronavirus pandemic will need to be paid.
This could come in the shape of major tax reform.
“With the budget in March and covid-19 cases still on the rise, the chancellor is expected to remain focused on laying out his plans for protecting jobs and providing wider economic support for struggling business,” Cameron said.
“However, with optimism around the potential of vaccinations allowing life to return to some normality over the coming year, the next big question will be how the government plans to recoup the huge costs of the pandemic and who will bear the brunt of the chancellor’s plans.
“High on the list of possible targets for the chancellor are pensions tax relief and wealth taxes. Equally, Rishi could be looking at increases to income tax and national insurance.
“The tax system can have a big impact on the most efficient ways of managing long-term saving and investment, something advisers are ideally positioned to support their clients in.”
Future of advice
The financial advice world has adapted well to the pandemic – after it was forced to change its business model overnight.
But more change is coming for the industry, according to Cameron.
“Advisers will be keeping a close eye on the Financial Conduct Authority’s response to its Call for Input into the consumer investments market,” he added. “Responses to this wide-ranging paper will be combined with the findings from the review of the effectiveness of the Financial Advice Market Review and the Retail Distribution Review, which unsurprisingly found the advice gap is alive and kicking.
“Areas under scrutiny are the definition of advice verses guidance, Financial Services Compensation Scheme levies and the potential to increase the availability of ‘pay as you go’ or streamlined advice.
“The possible introduction of more personalised guidance could offer opportunities for adviser firms to expand into new segments of the population over the coming years. “
Cameron also addressed the changes coming via the increased introduction of investment pathways
He said: “Providers will be launching their retirement investment pathways in February, for customers entering drawdown without advice.
“While this should help ‘DIY’ individuals avoid making particularly unwise investment choices, it won’t replace the personalised recommendations from an adviser on where to invest and how much income can safely be taken to last throughout life.
“Hopefully that distinction will be made clear and we could see pathways actually increase the demand for retirement advice.”
As International Adviser reported on 24 December, the UK signed a trade deal with the EU.
But not every sector has been prepared for post-Brexit life. Financial services has been kicked to the curb and there is still some issues to iron out, including regulation.
Cameron said: “Now the Brexit transition period is behind us, with the UK no longer bound by EU rules, there is the prospect of the FCA and Treasury reviewing both the approach to financial regulation, as well as removing some of the detail arising from the likes of Pripps and Mifid. This could include the definition of advice.
“The government has also already laid its intentions to focus post-Brexit on green finance and encouraging investment in long-term illiquid assets such as infrastructure.
“With the launch of its first green gilts in 2021, the government is sending clear signals to pension schemes that it wants to see greater green pension investments, as part of helping the UK recover ‘greener’ from the pandemic.”
Negative interest rates
Alongside Brexit and the pandemic, interest rates were a big news story during 2020.
The prospect of negative interest rates in 2021 is highly possible. But what does this mean for the advice sector?
Cameron said: “Throughout the pandemic, the Bank of England base rate has remained at a record low of 0.1% and in 2021 it could even go into negative territory. This sets a very real prospect that savers may be asked to pay banks for holding their money.
“If we do see such a radical change, people will need support and advice to make sensible savings and investment decisions.
“Some people may take this as a prompt to invest excess cash in stocks and shares while others may decide to pay off debts or worryingly, withdraw their savings and keep them ‘under the mattress’.
Lastly, Cameron spoke about how the pensions sector should be as an area of concern for advisers this year.
“For many, the state pension remains a significant element of retirement income,” Cameron said. “While the triple lock increase has been confirmed for April 2021, questions will inevitably resurface on its ongoing affordability and any changes will need factored into retirement planning.
“One of the greatest uncertainties when planning financially for later life is the potential to have to pay for social care costs, which for some can currently be catastrophic.
“Many will be hoping for an announcement on a new deal on social care funding, with a clear division of costs between the state and individuals. This will generate huge demand for advice on how best to plan ahead under new rules.
“The Department for Work and Pensions (DWP) will be consulting on a mandatory two-page template for simpler annual pension benefit statements in early 2021 along with a ‘pension season’ where all pension schemes will have to issue statements around the same time.
“This will give members a clearer picture of their overall pension savings and will be a useful stop gap before pension dashboards are rolled out in 2023.
“The government has yet to decide when this will start, but it’s something to look out for as it could be a catalyst for more people to contact advisers to help them review their pensions.”