Could a conservative approach see UK investors fall short in retirement?

Schroders Global Investor Study 2016 revealed a mismatch between UK investors’ conservative approach and their high expectations for their investment returns.

20 June 2016

The local UK results of the Schroders Global Investor Study 2016 revealed that retail investors take a “safety first” approach to investing, an attitude which could mean they struggle to meet their long-term investment goals.

Conservative approach

Schroders Global Investor Study 2016 found the main drivers for UK investors when choosing an investment were:

1. Obtaining a return higher than inflation
2. Getting back at least the amount invested at the end

This is encouraging as it suggests that retail investors in the UK don’t want to take the types of risks that have contributed to the volatile markets that we have seen in recent years.

However, they do desire an income of 7.5% from their investments, which is at odds with the 4% advisers would like their clients’ investments to generate.

7.5% is a large return compared to the current average stockmarket yield of 3.8% and most developed market interest rates of 0.5% or lower. This would mean investors either taking more risk to achieve desired investment returns; or accepting the lower returns commensurate with a conservative approach and making supplementary investment contributions.

Pension shortfalls

So, by taking such a conservative approach to their investing, UK investors risk falling short of their income target, which is needed to help them live their anticipated 20.2 years in retirement.

To compound the matter, investors could be misjudging how much the state will be able to contribute to their life in retirement. The study reveals that UK investors anticipate the state pension to contribute 19% of their pension pot.

That figure may not seem unreasonable now, but given the state of the global economy, it is difficult to see how the government will be able to raise enough in taxes to meet those expectations.

The disconnect between what income UK investors expect to receive, what their advisers expect them to generate and what is achievable in the market is a cause for concern. This needs to be addressed sooner rather than to later to avoid future generations potentially suffering large income shortfalls in retirement.

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