Asset managers will move to centre stage when the chancellor's pensions changes kick in
George Osborne defied predictions of a boring Budget by delivering a manifesto with major implications for investors, savers and the businesses servicing them.
Osborne dropped a bomb towards the end of his speech by announcing that over-55s can take their whole pension pot in cash and retirees will no longer have to buy an annuity.
Barclays analysts predict the £12bn annual UK individual annuity market will shrink by two-thirds within 18 months owing to the changes, although the bulk annuity market could offset some of that lost business.
This could create opportunities for asset managers to craft alternatives for the retirement market. Not to mention the new Isas (Nisas) that allow people to put up to £15,000 a year tax-free into shares and bonds rather than having to split a smaller amount between securities and cash. Peer-to-peer lending has also been given the go-ahead for Isas.
PwC asset management partner Rob Mellor says the pensions changes are massive and fund houses could be in line to benefit. The demand for consistent rates of return with little capital risk should start to drive product development around the City.
He adds: "Infrastructure assets would represent a good opportunity here, given their relative high yield and long duration, but there would be operational questions to answer."
He says asset managers will move towards supplying the retirement market and will be centre stage of financial services over the next few years.
F&C Asset Management head of consumer Rob Thorpe says product development teams will be kicking into gear, with a raft of launches in a year's time.
Investec Asset Management UK client group managing director David Aird thinks multi-asset funds are already perfectly placed to capture pension pots. "We may see more innovative products coming to the market with more multi-asset income products," he says. "And very few asset managers are truly producing multi-asset income solutions."
AIC director general Ian Sayers thinks many investors have the appetite to increase their risk and invest in equities over annuities.
"Many will think long and hard about buying an annuity offering, say, 6 per cent when this has no prospect for income growth and the capital dies with you when they could invest in a range of investment companies yielding 4 per cent, with the possibility of income or capital growth over the long term and the ability to hand down assets on death," he says.
This may not be a like-for-like comparison, but he believes the emergency low deposit rates have pushed investors to seek income elsewhere and they have found it in equities. That is likely to flow into how people fund their retirement, he adds.
"They have reckoned that, providing they can ride out the ups and downs in the market, they will get a better initial income, as well as the possibility of income or capital growth over the long term. And those that took this view when interest rates fell to 0.5 per cent in 2009 have been well rewarded."
Osborne also cemented the Seed Enterprise Investment Scheme, which was meant to expire in 2017, and locked in the programme's 50 per cent capital gains tax relief.
Renewables VCTs were hit by the news that dealing in renewables subsidies for wind and solar projects can no longer be combined with VCT reliefs. The change is not expected to affect VCTs that invest before July but it destroys at a stroke the future investment pipeline of several investment companies.
The move to tighten HMRC's tax giveaways came with a pledge to boost tax receipts by £4bn with a crackdown on tax dodgers.
Despite all the drama, the country's swelling recovery is on track to balance the books by 2019 - although the lion's share of public spending cuts, first heralded four years ago, is yet to be implemented.
Capital Economics managing director Roger Bootle says monetary policy will be instrumental in keeping the economy ticking over while the fiscal squeeze continues.
"What's more, there are still major question marks over whether the projected reductions in public expenditure can be achieved without causing unacceptable levels of damage to key public services," he says.
Bootle is more optimistic than the OBR about the UK's growth prospects and believes public borrowing could undershoot expectations in the shorter term.
Osborne touched on the need to bolster the UK's dwindling foreign currency reserves, which would mean selling pounds, Bootle says.
"Was the chancellor hinting that the authorities now stand ready to hold the pound down on the exchanges? If so, it would not be before time," he says. Key takeaway
George Osborne's bad news for the annuity market is good news for the UK asset management industry as inflows are expected to surge
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