With the pound plummeting, what does it mean for clients approaching or in retirement? Alison Steed finds out
The UK’s recent political turmoil has had a major impact on markets and the value of the pound, creating uncertainty for many people who are either approaching or in retirement. But it may not be all bad news.
Such significant swings create nervousness for investors, but providing a portfolio is well diversified, the falling pound could be good news, says Andy Butcher, branch principal and Chartered financial planner at Raymond James.
On September 22, the pound peaked at $1.13. But following the former Chancellor Kwasi Kwarteng’s inaptly named ‘mini-Budget’, the pound weakened against other world currencies and stock markets plummeted.
The pound fell to its lowest level ever on 26 September against the US dollar – three days after the mini-Budget – to almost parity at $1.05 according to data from currency exchange firm XE. It has since recovered somewhat.
Sterling rallied to $1.14 by the time of the Conservative Party conference on 4 October but fell back to about $1.11 at 09:20 on 20 October. Following Liz Truss’s resignation as Prime Minister that day, it rallied again to $1.13 at 14:30, before falling back to $1.12 by 19:30 the same day.
However, as well-diversified portfolios will have exposure to a wide range of overseas assets, particularly in the US, a short-term fall in the pound could help boost clients’ portfolios in the short term, says Butcher.
He adds: “The issue arises when and if sterling rebounds versus the US dollar and other major currencies.
This all creates additional volatility, which if looking at a long-term view may not be overly concerning.
But when looking at the short-term view of someone in retirement, it may have a significant long-term impact when they are looking at drawing down capital.”
Currencies are always listed as pairs and there is usually something impacting the ‘other’ currency and how it interacts with the pound, whether that is within the region of that currency or a wider issue, such as the Covid-19 pandemic or the war in Ukraine. It may or may not be beneficial for the pound and, while sterling may fall or rise steeply against one currency, it may interact differently with another.
Butcher says: “It is worth noting that while there was significant volatility around the pound against the US dollar – which was down around 5% in the few days around the mini-Budget – the impact on the pound against the euro was minimal, with the pound only down around 2.5% at the peak of the swings.”
No time to panic
Such volatility can be a friend to those further away from retirement with longer for their investments to recover. If they make regular payments, the benefit of pound-cost averaging when markets make a sustained recovery can create considerable growth.
Therefore, it is vital not to panic, says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown. She adds: “The movements in the market in recent weeks have been unnerving but it is important not to make knee-jerk reactions in response to short-term difficulties as markets do recover – making snap decisions to change your investment strategy could mean you crystallise losses and potentially make things worse.”
This kind of volatility can be difficult to navigate for clients closer to retirement, but they also have some good news. Gilt yields have risen along with interest rates in recent weeks, which has made annuities more appealing.
Annuities had largely fallen out of favour following the introduction of the Pension Freedom rules in 2015, when the Bank of England base rate was just 0.5%. The base rate at the time of writing was 2.25% and is likely to rise further in the coming months. Annuity rates have risen at the same time.
Gary Smith, financial planning director at Evelyn Partners, says:
“[At the end of September], with a £100,000 lump sum a 65-year-old retiree [could] buy a level single-life annuity that [would] provide an income of about £6,600 a year. At the start of this year, they would have been lucky to get £4,800, which means annuity incomes have risen by nearly 40% from their January floor.
“Looking at it another way,” says Smith, “if the 65-year-old lives to age 85 years, the annuity purchaser will get a total of £132,000 in income for their £100,000 outlay rather than the £94,000 they would have got in January this year. Alternatively, the 65-year-old would have to live for little more than 15 years to recoup their annuity outlay. Given this revitalisation, annuities are set to make a comeback as a valued part of the retirement planning toolkit.”
Advisers are typically telling clients to sit tight during this period of volatility, says Butcher, as “there is always short-term volatility and always a crisis somewhere”.
He adds: “As it is the UK’s turn, its hits home a little more, especially as it is in the news every day. Our job as wealth managers is to navigate this by taking advantage of spikes in yields and fluctuations in currencies.”
With Rishi Sunak named as the next Prime Minister at the end of October, it will now be a case of watching and waiting to monitor sterling and the markets, while offering suitable guidance and, importantly, reassurance, to clients.
Alison Steed is a freelance journalist