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Drawdown investment strategies failing to match retirement needs

Slipping through the cracks 620x430.jpgDrawdown investment strategies are still closely aligned with those for non-drawdown clients, new research shows, despite their differing needs.

Research from Aegon finds that the largest investment flows for both drawdown and non-drawdown clients over the last year were into multi-asset strategies, accounting for 45 and 46 per cent respectively.

Equity growth and bonds came in second and third place for both types of clients. Equity income was ranked fourth for drawdown clients, with 12 per cent of flows, compared to 8 per cent for non-drawdown investors.

The difference in the popularity of bonds was just three per cent between the two different types of investors.

The similarity in investment strategies persists despite a three-fold increase in the number of retirees that have opted for drawdown since the pension freedoms, and that drawdown investors have “different demands on their money and generally shorter investment time frames,” Aegon says.

Aegon investment director Nick Dixon says:  “Drawdown’s popularity has rocketed since the pension freedoms, but retirees’ investment choices are still adjusting to the needs of those that choose to remain wedded to the markets in retirement. Drawdown investors are largely favouring tried and tested brands and investment strategies over newer, more tailored options.

“As a result, there is a mis-match between the long-term growth objectives of many of the strategies being used, and the near-term income needs of retirees who use them. Retirees are also now more exposed to market highs and lows than they have ever been.

“While most drawdown investors have benefited in the largely buoyant markets witnessed since the new rules came into force, the strategies used haven’t yet been tested by a Dotcom or credit crunch style market shock. Our hope is that the market evolves further before one occurs.”

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. “drawdown investors have different demands on their money and generally shorter investment time frames” – well, true, but the difference is typically 20+ years rather than 30+ years and I’d be intrigued if you can tell me an investment strategy that is likely to deliver returns over 30 years but not 20.

    If we were talking about a highly adventurous strategy with high proportions invested in smaller companies then I’d agree it looks like a mismatch for someone who wants to rely on the fund for income throughout their retirement. But apparently we’re talking about multi-asset, and if multi-asset is suitable for you in accumulation then it will probably be in drawdown as well. In what should they be investing instead? Cash?

  2. Main difference is cash holdings (for short term income needs) and more single asset funds (to provide ability to create further cash if/as needed. Perhaps a bit more yield and income units – depending on client.

    Overall though, unlikely to be drastically different given time horizon typically 20+ years.

  3. Aegon make a valid point about market shock (or even a gradual erosion of growth) but I always wonder exactly what the underlying basis of statistics are. For example, for those who have purely accessed tax free cash, are they really in classic drawdown mode at this stage…

  4. Christina Musukwa 31st August 2017 at 8:15 am

    One would hope that more innovation would come from investment managers to develop a solution rather than wait for the markets to determine what happens next.

  5. Valid comments at the end of the article. The market has not experienced the downturn that occurred when drawdown first came out and income dropped drastically for clients fully invested. There is no right or wrong answer for clients in drawdown but I have no issues retaining cash to cover 2-4 years income and a multi strategy solution for the rest of the fund. This approach does need regular reviews ie ongoing advice. Recently I have been taking profits for clients to top up cash.

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