As the UK enters recession, Laura Miller examines the role financial advisers have been playing to support those affected
Covid-19 is morphing from a national health crisis to a personal finance crisis for millions. Households’ financial resilience – the ability to manage income shocks – is being tested by the second ‘once in a lifetime’ recession in 12 years. Financial plans are under pressure and in some cases are being ripped up and rebuilt.
One in four think Britain’s biggest challenge now is the state of the economy, the Office for National Statistics (ONS) found in a survey in the first week of August, even before figures showed the economy had shrunk 20% in Q2 due to the lockdown of most sectors to curb the spread of the virus.
Nearly one in 10 think the real danger is unemployment, as official data revealed 730,000 lost jobs between March and July. In a poll by the Bank of England, business leaders said unemployment will surge to 3.5 million this year.
Advisers’ clients, though demographically wealthier, include older professionals at risk of long-term redundancy, retirees on volatile stock market-linked incomes and working parents without protection if they suddenly become jobless. One in five people have had their finances affected by Covid-19, of which 68% face reduced income, according to the ONS.
End of support
“It will get worse,” says Mick McAteer, founder and co-director of The Financial Inclusion Centre, a UK not-for-profit organisation, “as government support and protections put in place by the Financial Conduct Authority (FCA) and other regulators to protect those in arrears on loans and other bills from aggressive treatment by creditors,
are wound down.”
UK household debt as a proportion of GDP was about 80% going into this, versus 57% for the euro area, according to the Institute of International Finance Global Debt Monitor. Mr McAteer continues: “Overindebtedness is a particular concern, but generally we have failed to build widespread financial resilience. Millions are in a very vulnerable state as the effects of Covid-19 continue.”
In July, the FCA, while setting out best practice for firms to do more to protect vulnerable consumers, calculated 24 million people in the UK display characteristics of vulnerability – physical and mental health issues, life events like bereavement, capability and financial resilience. Advisers know clients in all these groups.
Chloe Moran, a paraplanner at Boosst, says that when the firm rang round its clients during lockdown, “client vulnerabilities ranged widely from anxiety and concern, to being unable to buy certain food items.
“Clients were not too worried by their investments”, she says, “as we have educated them to expect volatility and to hold a healthy cash buffer.” This is clearly one direct example of advice building financial resilience. Boosst, like many firms, went above and beyond to help, “having calming conversations and even delivering eggs for a local farming client”, Ms Moran says.
Other advisers have been trying to maintain clients’ financial resilience by stopping those newly cash-strapped from tearing up their financial plans. At the time of the Personal Finance Professional going to press, the government’s furlough scheme continues to support 9.6 million workers by paying 80% of their salary, but that is still months with 20% less pay. Tens of thousands have already been laid off. Pension contributions and protection premiums are being sacrificed, weakening financial security now and in the future.
“We have seen a slight increase in people cancelling cover due to financial difficulties,” says Kathryn Knowles, protection adviser at Cura. “The danger is that the need for the cover – protecting incomes, mortgage liabilities, families – is just as important as ever, but some people simply cannot afford these policies anymore.”
Ms Knowles is trying to raise awareness of payment breaks offered by insurers as a better and little-known alternative to cancelling. Conversely, when coronavirus started she had people coming to her for unemployment cover, but “policies were quickly closed to new entrants”, she says, creating a PR problem for already hard-to-sell protection targeted specifically at providing financial safety.
Ms Knowles says: “What people will have seen was when they realised how much they needed us, doors became closed.” In one case, she says an income protection client lost out by just two hours.
“By the time we spoke, there were coronavirus exclusions placed on the policies they were eligible for,” she says. “It was not easy to hear the disappointment and fear that they couldn’t protect their income for their partner and young children.” A frontline NHS worker, the client caught Covid-19 and is still recovering.
Suspending pension contributions is similarly damaging. One in 10 workers had either cut their contributions or stopped saving entirely, Aviva found in a survey in July. Ros Altman, former pension minister and now a campaigner for older people, is sympathetic to those prioritising money now over money later, but says struggling on a suddenly reduced income during the pandemic, “may be a taste of what life would be like after they retire if they have not saved or made plans to replace their work income”.
Adviser LEBC explains to clients the false economy of not paying into a pension to save money. “The saving made by the individual is half or less of the total being paid into their pot, because the employer and tax-relief subsidy are lost when the employee ceases contributions,” says Kay Ingram, LEBC’s director of public policy.
The firm is also warning the unaware that if they cut their contributions below the auto-enrolment minimum of 4% of eligible earnings they technically opt out of the scheme and their employer is not obliged to offer them membership again until 12 months later, a rule that newly financially-strained firms may apply.
The self-employed – already least committed to pension saving, among the worst hit by the lockdown and the least covered by government support schemes – bucked their usual trend of a tax year-end boost to savings
and contributed 30% less to their pensions this April, according to PensionBee figures.
LEBC advises them to keep a pension plan open to contributions, to make catch-up payments later with tax relief if their position improves and to benefit from carry-forward rules. “For some pension plans this means continuing to pay in something, even just £20 a month, otherwise it will become closed to new money,” says Ms Ingram.
Advice firms that supported clients through the crisis by talking to them about their wellbeing, not just investments, will have gone a long way to securing those clients for good
Investment plans’ resilience has also been tested, by global stock markets tumbling in the first quarter, half of FTSE 100 companies cutting, scrapping or suspending dividends and businesses entering administration like cascading dominos.
“Client referrals often come to us with a basket of old investments they have accrued,” says Boosst’s Ms Moran, “typically taking significantly too much or too little investment risk, so we ensure their holdings fit their life plans and are supportive when times get tough.”
Unaided retail investors tend to buy high and sell low – devastating long-term pension and investment returns – with a real risk from the latter appearing in the first quarter when the FTSE had its biggest fall for three decades, only to rebound strongly in subsequent months. Echoing other advisers, Ms Moran says: “We hold clients’ hands to ensure they do not jump overboard when the oceans get choppy along the journey.”
LEBC’s Ms Ingram says this type of support – the use of diversification and risk management tools in portfolio construction, a clear investment process that continuously manages risk and regular rebalancing to smooth volatility – means “most of our clients have seen only modest losses during the crisis”, keeping long-term plans on track to build future resilience.
In the shorter term, cash buffers – especially essential to portfolio construction for retired clients in the age of widespread reliance on stock market-exposed defined contribution pension schemes – have been vital. “If ever there has been a time to use an emergency fund to pause withdrawals from a portfolio, that time is now,” says Ms Moran. For retired individuals, Ms Ingram says: “Having at least one or even two years’ income for essential spending in cash reserves means avoiding selling too much at a market low point.”
Annuities, out of favour since pension freedoms, have also proved their worth during the crisis, allowing retirees to weather market volatility and wait for investments to recover. LEBC tells clients to have most essential spending met by guaranteed income streams like the state pension, defined benefit pensions and annuities, so only discretionary income is dependent on market returns. Where withdrawals are required at Boosst, they have come from bonds the firm keeps in high-quality and low-duration holdings, “which have not really fallen in 2020”, says Ms Moran.
A good long-term cashflow plan will incorporate repaying debt as well, with the most expensive first. “It is important to talk to lenders and reschedule borrowing across a longer period if earnings have dipped,” says Ms Ingram, “most will be sympathetic to the borrower who is open with them and willing to take steps to manage their debt.”
Those with finances still on an even keel are being advised to pay off as much expensive debt as is affordable as soon as possible to guard against an uncertain economic future – a message already getting through as credit card balances fell by £4.7bn in April, the largest monthly fall in more than a decade as people opted to make repayments rather than spend.
Value of advice
In a survey by Threadneedle in July, 36% said the pandemic has made them put more value on professional advice. In 2019, the PFS estimated six million people in the UK need advice and are willing to pay for it but do not know where to go to access it.
Building financial resilience means supporting people in many ways advisers already do, says Ms McAteer: “To manage their debts, expand access to affordable credit, build up a savings cushion, extend pension coverage to underprovided groups such as the self-employed and expand access to affordable insurance and financial advice.”
Households have been forced to confront their financial resilience, or lack of it, in the face of an unprecedented shock. It is an opportunity to have fresh conversations with clients, their families and their communities.
Chris Budd, a financial adviser and founder of the Financial Wellbeing Initiative, says: “Advice firms that supported clients through the crisis by talking to them about their wellbeing, not just investments, will have gone a long way to securing those clients for good.”
Laura Miller is a freelance journalist