Trends Shaping Long-Term Financial Planning
As we begin the new year, we have the opportunity to look back over the past year at what has shaped the financial planning climate and, subsequently, to predict what 2019 may bring.
Vitality Invest* has identified four main trends that have held the most sway, and we have provided a summary of these below.
‘The field of wealth management has evolved and matured significantly in the 21st century,’ states Vitality Invest*. This is due, in the most part, to the advent of mass retail investment platforms, the first generation of robo-advisers and even publicly available derivative trading. We are also being presented with more choice than ever before, a fact backed up by the figures:
- 1980: the number of UK authorised funds according to the Investment Association (at the time, the Unit Trust Association) was 493
- 2018: the number of UK authorised funds according to the Investment Association (at the time, the Unit Trust Association) is 3,458
This is a sevenfold increase that is echoed by the increase in retail asset classes and funds available. The result? Benefits to consumers that include increased competition and greater access to low-cost passive funds which in turn has driven down asset-weighted investment costs.
As is often the case, it is not as straightforward as this, however. As Vitality Invest* puts it, ‘Variety has brought with it greater complexity, which in turn often leaves consumers confused.’ This means that advisers are more important and necessary than ever.
Life expectancy and healthy ageing
We are living longer and longer, and our life expectancy has increased exponentially. Here are some facts and figures to illustrate just how much things have changed over the last 100 years:
- In the UK, the average expected lifespan at birth of a baby boy has been extended by 31 years, from 48.4 years to 79.6 years
- For baby girls, longevity has increased by 29 years, from 54 years to 83.1 years
- In 1915, if a British man made it to age 65, his life expectancy was a further 10.1 years.
- Today, men turning 65 can expect to live for a further 18.8 years on average
- For women reaching the age of 65, their future life expectancy has increased from 11.5 years to 21.1 years
‘This remarkable extension to longevity has been primarily due to advances in the prevention and treatment of communicable diseases, widespread childhood immunisation and,’ adds Vitality Invest*, ‘(more recently) breakthroughs in the field of genomics.’
This all sounds like good news but there are caveats to our success in prolonging life. The first is that we also experience more years of poor health which in turn can result in expensive medical care. The second is our lifestyle choices; the Oxford Health Alliance has identified ‘four lifestyle choices (poor nutrition, inactivity, smoking and alcohol abuse) that contribute to four conditions (cardiovascular disease, diabetes, chronic lung disease and various cancers), which together account for 60% of deaths and have a profound effect on later-life morbidity.’
Third on the list is the misperceptions of our own mortality. Effectively we underestimate how long we’ll live only to find we haven’t fully provided for ourselves. In addition to this, we expect more from our later life. Travel, adventure, luxuries – all of these need to be planned for both financially and in terms of our health. Fifth, and finally, longer life expectancies pose a significant challenge to meeting long-term saving goals: if we expect to live longer in retirement we need to accumulate more savings. This has been made even more challenging by falling interest rates.
The shift to greater individual responsibility
According to Vitality Invest, these factors all require us to take more responsibility for our financial future:
- The combination of longer life expectancies and lower interest rates has led to the demise of the paternalistic model of pension provision
- Social benefits (state pensions, and the age at which they commence) have been scaled back
- Companies are rapidly phasing out their legacy defined benefit (DB) schemes, as the cost of maintaining them has escalated and the defined contribution (DC) schemes that have replaced them leave members bearing all investment risk and with no guaranteed benefits in retirement
- Default contributions into DC schemes are significantly lower than those historically paid into DB (which reflect the true cost of funding for the benefits they delivered)
It also falls to us to plan for the future in terms of our health and our financial security. As people, we tend to have a strong ‘present bias’, which means we prefer immediate outcomes over distant payoffs. This, combined with overconfidence and too much optimism, means that often people leave themselves vulnerable in the future. The suggested solution is a system that guides people to make choices that are in their long-term best interests.
Technology and customisation
Although every headline about tech in the past few years seems to be shouting about how life will never be the same again, the financial services industry has remained curiously immune – this is particularly true of investment. Personalisation is a factor, but it is based on aggregate population data rather than personal data and it takes ‘little or no account of lifestyle habits and state of health. The result is that savings plans based on these projections may be inappropriate for a particular person’s circumstances.’
*Office of National Statistics, Past and projected data from the period and cohort life tables 2014, England and Wales, 1841 to 2064, 23 March 2017 2 Public Health England, Life expectancy and healthy life expectancy, 13 July 2017
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This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.
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