Advisers have a wide range of views about the best ways to advise their clients on decumulation in retirement.
And that is not just differences between advisers in separate firms: some advisers operating in the same businesses also approach the issues with disparate strategies, according to research by my Platforum colleagues.
For starters, there is a pretty wide disparity between advisers about the minimum size of pension pot needed for an adviser to be prepared to look after a client in pension drawdown. That does not necessarily mean advisers are ignoring smaller clients – although many almost certainly are – but that most will not advise on drawdown where the investible assets are below a certain minimum sum.
That minimum amount has risen dramatically in the last year – continuing a trend from over four years ago before the pension freedoms. This year, two out of three advisers will not advise on drawdown for people with pension pots of £75,000 or less; last year this was less than four out of 10. It is a dramatic change and I would bet real money that the minimum for most advisers will be a good deal higher next year. Some 17 per cent of advisers will not deal with drawdown clients with a pot size less than £150,000 – a big increase on last year.
Fewer than 8 per cent of advisers now set no minimum pot size at all for advising clients in drawdown. That is a big drop from the 14 per cent who said they would take on any size of client last year.
This is a serious issue because one area where advisers are in broad agreement is their overwhelming general preference for drawdown over annuities for most clients. There is also widespread agreement that annuities have a place, but it is almost exclusively for clients with smaller pension pots. A smidgeon over half of the advisers surveyed said they had recommended annuities in the last year, which suggests the annuity market might not be dead yet. But new annuity business figures and our other evidence shows that the proportion of retirement funds going into annuities is much lower.
A few advisers recommend blended solutions – annuity purchase to provide for core expenditure needs and drawdown for the discretionary elements of their spending – but it does not seem to be a widely used solution.
So have widely accepted solutions emerged, apart from a general enthusiasm for the avoidance of annuities? Third-way solutions failed to get traction in the market, according to the survey, and the withdrawal of MetLife from this sector seems to have confirmed this. What works in the US does not automatically play well elsewhere, as many North American providers have discovered in the past.
One of the big issues among advisers is whether drawdown investment portfolios should be pretty much the same as portfolios designed for accumulation. The combined impact of pound-cost ravaging and sequencing risk together appears to increase the risks of drawing capital and income from a portfolio compared with the building-up stage. So how should this be accommodated into portfolio design?
There is considerable scope for variations in strategy and that is before getting into different advisers’ approaches to asset allocation and fund selection. Some advisers and discretionary fund managers assert that there is little or no difference between accumulation and decumulation for most clients, and ignore the issue altogether. Another approach is just to adjust the risk profile rating down a notch or two for decumulation although how much is open to debate.
Bucketing is yet one more possibility favoured by some advisers. This involves setting up two or possibly three separate portfolios. The portfolio for immediate needs might be cash or short-dated securities; the portfolio for medium-term needs would have some medium-dated bonds, perhaps some defensive equity funds, and one might go a little wild for the very long term. The client spends from the low-risk pot which is then topped up in turn from the high-risk portfolios. Advisers differ about how and when to move funds between buckets – most are nervous about getting into market timing. The combinations and permutations are endless.
Multi-asset and multi manager funds are very widely used, mostly for smaller pots. Some advisers – perhaps the older ones – may recognise in them echos of the unit-linked managed or balanced life and pensions funds of a long gone era.
Amid all this variety of investment solutions for retirement, an inter-esting finding from the research is that only 40 per cent of advice firms say they have a centralised retirement proposition, that is, a centralised investment proposition for decumulation. This is a lot lower than the number of firms with general centralised investment propositions.
Discussions with advisers suggest this partly reflects the fact that some advisers do not think there is much difference between investing for accumulation and decumulation. But it also shows lots of firms do not have agreed processes and strategies for clients; some no doubt because they are too small to need such formal arrangements, but many because they just have not got round to agreeing one. Time to get this sorted.
Danby Bloch is chairman of Helm Godfrey and consultant at Platforum