By Matt Taylor, Senior Wealth Planner
Despite the negativity surrounding Brexit, as well as other recent economic uncertainty, investors and businesses have been enjoying excellent conditions for the last few years. Low inflation, low borrowing costs and a rising equity market with low volatility have all been features of the most recent economic cycle. But as we look ahead, we discuss why 2019 could be a challenging year - especially for those nearing, or in the early years of retirement.
1. Rising inflation
The UK has enjoyed some of the lowest inflation conditions in nearly 30 years. But with the Consumer Price Index (CPI) rising above the Bank of England’s target of 2%, and the outlook remaining opaque as we navigate Brexit, rising inflation could quickly become a retiree’s nemesis. If pension savings are not sufficiently invested for growth, inflation can eat away at a pensioner’s income in real terms, leaving them poorer as the years go on. For people in their early years of retirement, this can pose a very real threat to the lifestyle they’re able to afford.
2. Interest rates on the increase
For pensioners with a large amount of cash savings, rising interest rates may sound like a blessing, but the reality could be somewhat different. If, as predicted, rates increase in 2019, they’re unlikely to rise dramatically and will be passed on to mortgage owners and those with unsecured debt well before savers feel the benefit.
And rather than being savings-rich, a report by More 2 Life and The Centre for Economics and Business Research found that pensioners are predicted to have amassed £86 billion of debt by the end of 2018 (it was £50 billion five years ago)[i]. With debt in retirement on the increase, rising interest rates could prove a major setback to retirement wealth.
3. Stock market volatility
For the last 10 years, investors have enjoyed relatively sanguine stock market conditions. But as interest rates and bond yields rise, equity markets are likely to experience sustained volatility as investors take flight to less risky investments. It can be tempting for pensioners to ‘disinvest’ their savings in such conditions – an understandable reaction to volatility when sustaining financial loss becomes a tangible threat to their income. But for the reasons mentioned above, having too much money in cash can prove just as risky, as savings stand even less chance of keeping pace with inflation.
4. A stagnant property market
An increasing number of pensioners are relying on property income and growth to fund their retirement. While property can prove to be a good bet over the longer term, current market conditions remind us that nothing can be taken for granted.
The outlook for house price and rental income growth in the near term is undoubtedly subdued. According to the UK Residential Market Survey (which is issued by the government, Bank of England and other key institutions such as the International Monetary Fund), the forecast for the next 12 months remains broadly flat, especially in more expensive parts of the country such as London and the South East. The survey also predicts that rental growth will be less than 2% next year, below the rate of inflation.
If interest rates increase as predicted, and if economic growth slows, this could prolong these stagnant property market conditions beyond 2019.
5. Increasing reliance on ‘Bank of Mum and Dad’
As if new retirees don’t have enough to worry about, they’re finding it more and more difficult to shake off the financial dependency of their children. A report by the Resolution Foundation[ii], estimates that it now takes a 27 to 30-year-old first time buyer around 18 years to save for a deposit if they’re relying solely on savings from their own disposable income (up from three years two decades ago).
With graduates leaving university with an average debt of £50,000,[iii] and a new home costing an average of £232,554 (£482,241 in London)[iv], it’s hardly surprising that the younger generation are finding it increasingly difficult to go it alone.
Make a positive change for 2019
If you’re nearing retirement, it’s important to be aware of these risk factors in order to protect your future wealth. Seeking help with your retirement planning can make a huge difference. A financial adviser can help you take advantage of, as well as protect yourself from, the prevailing market conditions. Only then can you hope to achieve the best version of your retirement – whatever that happens to be.