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Drawing up a drawdown plan

Using risk targeted funds in drawdown

When it comes to investing in funds at drawdown, investors often lean towards low risk. This is because low risk funds typically carry lower volatility, which leads to lower fluctuations of returns. They can also help manage sequencing risks and lead to a more stable monthly income.

This might seem like a sound retirement plan, but it is not necessarily sustainable. The reason being is that lower risk often leads to lower returns and this is especially true if the drawdown pot is on the smaller side. To offset this concern, one might reconsider and go for higher risk asset classes. This would allow for growth in the investment pot but at the expense of more volatility and with an increase in sequencing and longevity risks. Taking a more balanced approach could arguably be the best course of action because it adds a broader mix of lower and higher risk assets as well as a better chance of sustainability over many years of retirement, but is buying a balanced fund the best route?

In our latest research, we homed in on the various fund choices and compared the performances of each. Take a 65 year-old client, for example, with a current drawdown pot of £75,000. This retiree wants to boost his annual £8,546.20 state pension so that he can receive a total income of £1,000 per month which rises with inflation. (We added £500 on top of the £12,000 to pay for his advisory fees.) We found that over 30 years this client would need to increase his pot to £179,386 in order to meet his drawdown needs.

We calculated this by running one thousand simulations on the actual returns of the ABI Mixed Investment sectors with the use of Monte Carlo simulation, a technique used to understand the impact of risk and uncertainty by modelling the probability of different outcomes. For each simulation we randomly mixed the last 30 years of returns (to account for sequencing risk) to help us calculate the likelihood of the pot lasting. The table below highlights the results:

£75,000 initial investment ABI 0-35 sector (low risk) ABI 20-60 sector (mid risk) ABI 40-85 sector (high risk)
Chance of money lasting full term 91.7% 75.1% 73.1%

Source: Morningstar Direct & Canada Life Investments research, January 2019.

In this client’s case we found that a lower risk fund leads to a better chance of the drawdown pot lasting than an investment based solely on a balanced strategy. Nevertheless, we also looked into whether it was possible to increase that chance while at the same time providing a positive return at a 95% confidence interval. Our research showed that there is indeed potential for this when investing in all three choices in order to create an overall balanced strategy. We found that instead of choosing one fund clients could invest an even amount into all three (low risk, mid risk and high risk). By taking the income from the lowest risk and rebalancing the portfolio back into equal holdings, investors could increase the chances of both their drawdown pot lasting as well as achieving better growth.

£75,000 initial investment Equal mix, rebalanced monthly
Chance of money lasting full term 96.3%

Source: Morningstar Direct & Canada Life Investments research, January 2019.


When we ran the same simulations with the mixed drawdown pot we found that the chance of clients’ money lasting longer and the probable sizes of their pots all increased without a complex strategy. Therefore, our research highlighted that clients can potentially make their drawdowns last longer by arranging a drawdown pot to invest in a risk targeted fund range (say a Portfolio 3, Portfolio 5 and Portfolio 7), setting the monthly income to come from the lowest risk fund and then automatically rebalancing the pot back to its starting asset allocation.

By Andrew Morris, Sales Manager, Canada Life Investments

About Canada Life:

Canada Life is part of a group of companies controlled by Great-West Lifeco Inc., a diversified financial services holding company headquartered in Winnipeg, Canada. Through its subsidiary companies, Lifeco has operations in Canada, the United States, and Europe. Great-West Lifeco and its insurance subsidiaries have received strong ratings from major rating agencies.

Canada Life Limited, a wholly owned subsidiary of Great-West Lifeco, began operations in the United Kingdom in 1903 and looks after the retirement, investment and protection needs of individuals and companies alike. As well as providing stability and security through its individual contracts, Canada Life Limited has grown to become the leading provider of competitively priced group insurance solutions.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority. Canada Life International Assurance Limited and Canada Life International Assurance (Ireland) DAC are authorised and regulated by the Central Bank of Ireland.



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