View more on these topics

Rethinking Retirement

The new pensions freedoms that came into force this April allow much more flexibility on how to invest for and in retirement.

By Henry Cobbe

The new pensions freedoms that came into force this April allow much more flexibility on how to invest for and in retirement.

This flexibility is welcome and overdue. It also means that advisers have a more important role than ever in helping their customers navigate the multi-dimensional world of retirement investing: both from a financial planning perspective and from an investment perspective.

The challenge

From a financial planning perspective, on the one hand not much has changed: the objective remains to ensure customers have the means to enjoy retirement they expected. On the other hand, responsibility has shifted: it is now in the adviser’s court to help customers make the most of their newfound flexibility. This means advising on drawdown rates and designing solutions for the various different retirement ‘buckets’ (for example cash, investments, guarantees and planned legacies) with a clear understanding of the tax position.

As if this wasn’t enough, from an investment perspective, creating and managing an investment strategy for decumulation requires consideration of a fundamentally different set of objectives and risks. Whereas traditionally, accumulation focused on growing a pot, the focus for decumulation is about making it last. In technical terms, the main risk for retirement investing is 'shortfall risk' — the risk of running out of money to have the retirement your client expected.

The key retirement risks

Managing shortfall risk is a bit like running a defined benefit (DB) pension scheme. The value of the pot’s assets have to at least match the present value of the drawdown payments it will have to make over the customer’s life. The reason shortfall risk is so important is there are no future contributions from salary to top up the pot.

The key drivers of shortfall risk are not only the familiar ones such as the market risk (volatility) associated with managing assets and inflows, but also less familiar ones associated with managing payments and outflows. This means ensuring the pot can stretch to cover drawdown payments and their sensitivity to interest rates (duration risk), ensuring the client does not outlive savings (longevity risk), ensuring portfolio increasingly matches the currency of the drawdown payment (currency risk) and ensuring the pot can match or outpace inflation (inflation risk).

It’s not surprising that with these different types of risk a different approach to asset allocation is required for professional retirement investing.

Delivering the right kind of income

For decumulation, investing to support a retirement income does not necessarily mean investing in high-income-yield products. It’s important to look beyond the headline income yield to consider the underlying asset allocation to understand the level of risk involved and to consider how that squares up to the key retirement risks.

So using equity income funds alone for drawdown is probably not appropriate. For clients seeking income yield, multi-asset income provides greater diversification. Providing the right kind of retirement income means your pot is being managed to ensure it lasts over time. As time goes on, the level of risk should necessarily decline, so to provide a purpose-built drawdown strategy, we believe target date funds therefore have a key role to play.

Target date funds explained

Many advisers simply assume target date funds are the same as lifestyling. This is not the case. They are much more flexible with managers able to introduce a tactical overlay to ensure the asset allocation can adapt to changing market and legislative conditions.

Target date funds offer a ready-made strategy both for the accumulation stage (before target date) and the decumulation stage (after the target date). The target date in the name of the fund is simply the date that you expect drawdown to commence: so for drawdown it is a start date, not an end date.

These funds do not distribute income (so may not have a 'yield'), as it is more tax efficient to roll up the income within accumulation units. Furthermore, when units are sold to make drawdown payments, the underlying mix of assets is not affected, so your investment strategy remains in place.

We have been working with AllianceBernstein since 2012 to develop professionally designed and managed target date funds that build on decades of institutional experience in managing retirement risks for pension schemes.

With retirement planning now infinitely more complex, the need for purpose-built drawdown portfolios has not been greater. This is why we believe that the Architas BirthStar target date funds, purpose built for retirement investing, can help form part of an advisers’ toolkit.

Henry Cobbe, CFA is Head of Research at BirthStar, the research and advisory firm that worked with AllianceBernstein to create BirthStar target date funds.



HSBC to axe 8,000 UK jobs

HSBC has confirmed plans to cut up to 25,000 jobs as part of a restructure of the business, including up to 8,000 roles in the UK. The total cuts exceed reports from last weekend, when it was suggested redundancies would reach 20,000, and represent a reduction of more than 10 per cent in the bank’s […]


F&C to rebrand as BMO Global Asset Management

F&C Asset Management is being rebranded to BMO Global Asset Management following its acquisition by BMO Financial Group last year. From 6 July, F&C’s institutional, intermediated retail and wholesale business will be renamed BMO Global Asset Management, while the F&C REIT will become BMO Real Estate Partners. F&C’s investment trust business will remain as it […]


UFPLS vs flexi-access drawdown: drawdown wins by a country mile

If there is a straight choice between flexi-access pension drawdown and uncrystallised funds pension lump sum, flexi-access wins by a country mile in virtually every situation. The Treasury prefers to pronounce UFPLS as “uffplus”, presumably because the plus syllable lends a positive quality to this otherwise ridiculous expression. Most pension professionals prefer to pronounce it […]


Barclays includes bonuses in mortgage affordability calcs

Barclays now takes into account bonuses in its affordability calculations as long as borrowers meet its income requirements. Sole applicants must have a gross income of at least £75,000, excluding the bonus. With joint applications, one applicant must have at least a gross annual income of £75,000 or they must have a joint income of […]

Image courtesy of Stuart Miles at

Pension freedom: wish you were here?

Out there lies a warm ocean of desert islands, sun, sand and palm trees, where individuals can choose how and when to tax-efficiently access their pension fund and realise the retirement dreams they have worked so hard for.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm