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