It is time there was a grown-up conversation about investing to generate post-retirement income. The pension freedoms have utterly changed the retirement planning scene and many advisers have simply not yet caught up with the implications and changed their practices accordingly.
One of the more startling facts to come out of last week’s Platforum 2017 conference was the revelation that some 60 per cent of advisers do not have a centralised retirement proposition, that is, an agreed approach to investing in retirement.
Just over half the firms with at least £100m in assets under advice do have a centralised retirement proposition but, frankly, you might have thought the proportion would be nearer 100 per cent.
Far more firms have developed more general centralised investment propositions but these tend to lack the special focus needed on the planning requirements of people using their pensions and other assets for income.
The emphasis here is on clients who need to generate regular amounts from both dividends or interest, as well as by digging into capital on a regular basis.
There are some lucky clients who do not need to draw on their pension to provide them with an income after they stop work. In their case, the freedoms have transmuted such funds from a tax-efficient retirement plan into an inheritance tax mitigation arrangement of almost unparalleled attractions. Their pensions are free of IHT when they are passed down the generations but are nevertheless available to draw on if they ever need cash.
The pension scheme for such clients is the ultimate reservation of benefit – something the IHT legislation strives mightily to ban for almost every other category of asset, with the exception of qualifying business assets which are mostly riskier and often much less liquid.
The best most people can achieve in terms of IHT planning with their pension is to draw on their other, potentially subject to IHT, assets first before drawing on the pension later, in case they die before.
With this in mind, most people need an investment plan for drawdown that will provide a regular, steady and predictable source of spendable flow.
Some of their expenditure will be core outgoings they cannot defer or avoid, such as food, services, council tax and so on. Some of it will be more or less discretionary, such as holidays, travel, entertainment and eating out. And some might be very flexible; gifts to the family, perhaps.
The discretionary or flexible expenditure could be reined in or dropped altogether if needs be. Each client will have their own spending patterns and priorities, which planners must understand and monitor on an ongoing basis.
When people accumulate assets, they can afford to take more risks, and the longer they have before they need to start drawing on the money, the more risks they can afford to take. But once someone has stopped work, their attitude and ability to cope with possible losses will change radically.
Clients and their advisers need to recognise this and adjust the planning accordingly.
The enemies of dependable retirement income from investments are well-known, they are just not sufficiently acknowledged. Top of the pile is sequence risk: the danger that early major investment losses drastically drag down the potential for growth and income in a portfolio because the client is drawing on capital at a very low valuation.
Then there is the related risk of reverse pound-cost averaging (or pound-cost ravaging), where the client cashes in more of their units or shares when their values are low than when they are high on a regular basis.
And then there is cost – the costs of investing and the costs of advice. If clients are aiming to draw a relatively modest 4 per cent net of their investment portfolio each year, total costs of investing and advice will represent half this amount, which could turn out to be one of the highest regular costs the client is incurring.
That may be an unfair way to look at such costs but it is how many clients will consider it, especially once Mifid ll kicks in next year and total costs will have to be disclosed even more clearly.
So advisers need to develop a clear and reassuring approach to investing for retirement income. One that demonstrates seriously good value for money. In later articles, I will look at the different approaches that can be taken and consider their various advantages and drawbacks. Every adviser firm with clients in drawdown should have an agreed coherent centralised retirement proposition.
Danby Bloch is chairman of Helm Godfrey and consultant at Platforum