As wealthy baby-boomers reach retirement age, they are faced with issues including upkeep of lifestyle and transfer of wealth to the next generation. Many private banking clients, however, continue to work and invest in risky portfolio allocations. John Schaffer explores the behaviours of private banks’ older clientele
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Wealthy individuals are not exempt from the challenges of retirement. The concerns for high net worth individuals (HNWIs) include having sufficient wealth to continue the lifestyle they want in retirement, how they can best use their assets to support themselves and their family, and whether they can afford to leave a legacy behind.
According to a UBS report, the UK’s wealthy individuals are less likely to retire, and are "still hungry for risk" after retirement age. However, this is not merely for financial benefit.
The report, UBS Investor Watch: Why should I retire?, reveals that HNWIs continue to work after the age of 65 as they are passionate about the jobs they do. Around 89% of respondents (UK investors with over £250,000 in investable wealth) said they enjoy their jobs, with financial rewards often being a secondary consideration.
Ollie Gregson, head of private bank investment group, UK and Channel Islands at HSBC, tells PBI: "Many of our clients don’t necessarily need the money or need to work, but they do want to keep active and they do enjoy the intellectual challenge. We have seen an interest from clients in continuing to work for longer in a non-executive way or in a consulting capacity. Some of those, admittedly a smaller number, are also angel investing."
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By GlobalDataThe UBS report shows that investors aged over 65 years do not become risk-averse, as they want to leave a legacy – either through philanthropic causes or through transfer of wealth to subsequent generations. Over 60% of respondents cited leaving a financial legacy as a main motivation for accumulating wealth, and 67% said that their knowledge and experience had equipped them to take calculated risks.
Nick Tucker, head of UK Domestic at UBS Wealth Management, tells PBI that the findings are surprising and "counter-intuitive" as, traditionally, risk appetite tends to diminish as investors get older.
"Traditionally, as you get older, your risk profile reduces because you’ve got longer left to live. I think in many ways this is still true, but I think that if you are wealthier, you start to think about what the wealth is for and what you are trying to achieve. Your wealth becomes not so much your wealth, but your legacy’s wealth."
Tucker adds that older investors’ aims can be oriented around goals such as providing funds for grandchildren topurchase property, or for education.
Tucker notes that the difference in asset allocation between demographics is changing less: "Historically when you were young, you would have a risk heavy asset allocation, so predominately equities. As you get older, you would have more fixed-income. That shift isn’t happening any more."
However, Sarah Deaves, private banking director at Lloyds Private Banking, says: "We haven’t seen an interest in older clients investing in riskier strategies to provide for their heirs, and this isn’t something we would recommend in isolation. "Additionally, while saving for future generations the most effective strategy may not be to continue holding funds, but to gift funds including using the available Inheritance Tax exemptions such as the annual gift allowance or out of income gifting."
Clearly, strategies for retirees will vary significantly depending on their wealth and retirement plans that are already in place. Andrew Power, investment management partner at Deloitte, says that the appetite for riskier allocations often comes from clients not receiving a large income from a company pension scheme.
"The issue is more for people who haven’t been in a defined-benefits scheme, or have been in defined-contribution schemes, because typically defined-contribution levels have been half of defined-benefits. That’s where you see people try and diversify their sources of investment with property (commercial and residential), overseas bonds, alternatives because regular fixed-income is giving a low return and dividends are relatively low."
A significant concern for HNW retirees is to maintain the lifestyle that they are used to during their working years. Gregson suggests that baby-boomers have high expectations due to years of riding a bull market.
"We’ve pretty much been in a structural bull market since 1987, and a lot of these baby boomers have ridden a very long and substantial bull market in financial assets.
"A key area of retirement planning is income in retirement. We are in a world of huge strain for savers and retirees. Interest rates are near all time record lows and our view is that interest rates are likely to continue to remain low in the UK. This search for yield and need for income in retirement is the biggest element of our conversations with clients. What is key in our conversations is trying to understand whether their assets and liabilities are sufficient to cover their lifestyle needs, now and in the future, including the cost of long-term care"
With UK citizens living well into their 80s,retirees have to consider the potential costs of long-term care. Merely the length of retirement is also an issue – HNWIs are used to significant spending. However their wealth can be quickly eroded, especially if there is no, or reduced, income.
The situation is different for the UK’s ultra-wealthy retirees. Deaves tells PBI that, amongst Lloyds’ UHNWI clients "there is less reliance on pension fund assets, generally more capacity to accept investment loss, but conversely perhaps, greater expectations and need to consider tax issues, which creates different complexities."
Investor sentiment amongst older individuals in the UK may also have changed due to pension reforms brought in during 2015, which allowed people in Britain over the age of 55 to draw down income from their retirement savings in more flexible ways.
UBS’s Tucker explains: "Pension reforms have resulted in a lot more conversations with clients, because options have increased. The sophistication of advice that clients need has become significantly greater."
Deaves says that the pension reforms prompted Lloyds to revise its approach in April 2015.
However, Gregson, HSBC, says that there has been "no substantial material impact", in terms of increasing client numbers or changing behaviours.
