Danby Bloch: What’s on the drawdown menu?

Bloch-Danby-2014-MM-700.jpg

There are a dozen or more drawdown investment solutions from which advisers can choose and they can mix and blend them to perm hundreds more. We are in a new world but with lots of familiar landmarks and features.

Capped drawdown has been with us for many years, fully flexible drawdown has been around for a much shorter time and the idea of wealth cascading down through generations is less than a year old. We cannot plead that drawdown is new but those who have been advising on it for years might find it hard to admit they should be reviewing their recommendations.

One of the big developments is that advisers and providers are thinking much more critically about the nature of drawdown, in particular why it is different from the accumulation stage of retirement planning. Until relatively recently most of us had not thought that much about the extra hazards of drawdown: sequencing risk, reverse pound cost averaging or mortality risk.

One of the growing realisations is that in the world of planning for retirees (perhaps more than in any other planning area) the strategy must be driven by clients’ needs and wants – not a one-size-fits all approach. Another is that there is no point in most cases thinking about the pension in isolation from all the other investments and assets of clients.

Many clients’ attitudes towards pensions may well have altered or would do if they knew about the recent change in legislation that effectively allows pensions to be passed down free of inheritance tax. From being the asset pool from which most rich clients would draw their income first, a pension portfolio might now have become the asset they would draw on last of all.

Clients have a hierarchy of needs. At the bottom layer they require enough income to live at a fairly basic level, providing food, shelter and warmth. The next layer is the desire for discretionary expenditure: holidays in exotic places, eating out, leisure activities and so on. The boundary between the two is often vague and hard to define, and what counts as essential to one person may be a frippery to another. It is an important distinction, though, and should be built into every long-term cash flow projection, however crudely.

Into this word of different hierarchies comes a whole range of investment strategies for drawdown. Here are some of them:

Investing for maximum long-term capital growth: For the client who wants to pass their pension to their children or grandchildren a relatively high risk strategy could be feasible. Certainly high volatility is not likely to be an issue. Of course, the danger is that circumstances and legislation could change.

Investing only to draw the “natural income” from a portfolio: Dividends from equities have tended to grow and so has the underlying capital value of equity portfolios. Remember, however, that sometimes it has not.

Investing in multi-asset funds: This might provide a smoother income and capital return and would probably be cheaper to manage than portfolios, although some of the charges can be high.

Target date funds: These are multi-asset strategies that gradually move through different risk profiles (from higher to lower) as the target date approaches. The strategy is relatively new to the UK but well established in the US.

Having different pots for different needs: This could be, for example, cash for the client’s immediate income needs, bonds for the longer term and equities for the longest term. This approach could iron out short-term capital fluctuations but might require some very fancy market timing for disposals of bonds and equities.

A well-managed, low-volatility, total return approach: This is, theoretically, a really good answer but it can be hard to provide the returns clients expect and value, with the low volatility they mostly only value when they do not get it.

Structured products: These can provide guaranteed minimum income and/or capital returns but at a price and possibly with a greater degree of complexity than many clients are comfortable with.

Of course it is possible to mix all and any of these approaches, as well as use an annuity to provide the basic guaranteed income either from the start or later on in retirement. These and the many variations and combinations make for a very big menu of choices.

Danby Bloch is chairman at Helm Godfrey

Recommended

hopkins

Platforum: Retirement income trends from across the pond

The UK at-retirement market is in the midst of massive change. This is news to no one. But it is not just the pension freedoms that are changing our market. The retirement market sits at the epicentre of a perfect storm of change driven by regulators, technological shifts, competitor dynamics and changing consumer preference. Financial […]

Aviva-signage-building-2013-700.jpg

Aviva appoints head of D2C platform

Aviva has appointed former Charles Schwab senior vice president Rodney Prezeau to head up its new direct-to-consumer platform. Prezeau has taken up the role of consumer platform director at the life and pensions giant, which announced the launch of its platform last week. The platform allows customers to manage their savings, investments and pensions in […]

House-Home-Property-Ladder-Mortgage-700x450.jpg

Remortgage market ‘springs into life’

Remortgage lending is making a comeback with the number of approvals up year-on-year for the third consecutive month. Data from the Bank of England, published this morning, shows there were 36,003 loans approved for remortgage in May, a 26.5 per cent increase on the 28,455 loans approved in May 2014. Mortgage Advice Bureau head of […]

Ian McKenna: Race is on to solve the pensions data puzzle

For decades Britons were far more likely to get divorced than change banks but this is no longer true. How this change has been achieved provides an important lesson for the long-term savings industry and presents a clear case for action by life companies and platforms. Not only is it now possible for people to […]

Pension savings-2015

Pension tax relief: parked (for the moment)

The national news agenda has been dominated by pension issues this month. For those that missed it (and there cannot have been many given that this was the lead story in spoken and written media), the Chancellor announced a decision to make no decision on pension tax relief in his 16 March 2016 Budget speech. To […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment