An aging population faces many dilemmas ranging from the basic, such as “When do I retire?” through to the aspiring “How can I help my children with their lives?”. But the most basic question of all is the one that requires the most thought and advice, and is one that can cause advisers the most difficulty, “Will I have enough money to retire comfortably and achieve my retirement goals?”.
How do advisers plan for a client's retirement?
With the Pension Freedoms unveiled in the Chancellor’s budget of 2014, many predicted that scrapping the requirement to purchase an annuity would lead to frivolity when retirees accessed their pension cash; but what we’ve actually seen is more people demanding financial advice. This demand for advice is only set to grow as there is a vast cohort of savers approaching retirement that have shown they are willing to pay for independent financial advice to provide them more certainty in retirement.
As a result, decumulation in UK retirement planning has had to evolve significantly and rapidly over the last eight years. Recent developments have been done with PROD in mind, to make sure that the new products and solutions offered to end clients are both effective and also suitable for their situation and needs. As the need for appropriate client segmentation and suitability comes more to the front of advisers’ minds, the need for appropriate products across all phases of a client’s investment journey increases.
“Only 49% of advisers say they currently have a dedicated CRP, so a large proportion of clients are not getting the financial advice that they need”
FE fundinfo Adviser Survey, 2022
What this means is that decumulation strategies in retirement planning, and their particular relevance to clients in drawdown, have never been more important. We see many financial advisers positioning their clients well in the accumulation phase of life, but many will then also still rely on the same investment propositions they used in accumulation to manage decumulation risks, even though the differences are large and accumulation strategies are often not suitable in retirement. Common industry practice has been to adjust investment portfolios heavily towards a fixed income allocation while simultaneously reducing their equity component as clients approach retirement. The emphasis has always been on the willingness or tolerance of risk rather than the ability, or not, to take on more risk.
Changing risks need an adjusted approach
It is commonly seen that the key risks for clients in the accumulation phase prior to retirement range from market volatility and reduced returns, a client not investing enough while they can (or investing too cautiously), through to de-risking too early and missing out on potential returns while still at a stage they can take on the associated risk.
However, as clients shift from a “saving” and accumulation phase, to retirement and the need to take an income, we see other risks emerge. Clients could see a negative impact on their pot from improper return sequencing, or run the risk of running out of capital before they are able to achieve their retirement goals, both of which are much more difficult to manage when using an accumulation strategy.
These changing risks mean that a dedicated centralised retirement proposition (CRP) is needed so that the risks and requirements of retirement can be adequately prepared for and factored in to cash-flow planning and investment decisions. However, only 49% of advisers say they currently have a dedicated CRP, so a large proportion of clients are not getting the financial advice that they need (FE fundinfo Adviser Survey, 2022).
A centralised retirement proposition is a good starting place to help clients plan for retirement and is an approach to considering a drawdown-focused retirement strategy. This is important because the CRP will account for the retirement risks, which do not only apply to accumulation clients. A dedicated CRP will also specifically account for the client’s retirement timeline from the moment they want to start taking an income from their invested assets.
The focus for decumulation is ensuring an appropriate asset allocation so that the clients can achieve their retirement goals and has enough income for their needs. Decumulation model portfolios should be consistent not only with the client’s risk profile but also with an investment term that ensures the portfolios are durable. An adviser using a centralised retirement proposition is better able to deliver consistent advice to clients and factor in the specific cashflow needs or investment considerations for each client.
How can FE Investments help?
At FE Investments, our Decumulation model portfolios are built specifically for a broad range of risk profiles and investment terms, and there is greater consistency and control around the asset allocation. The beauty of our approach is that model portfolios of different investment terms can be mixed to meet the specific withdrawal profile and cashflow plan of a client. We understand that retirement planning and creating a retirement investment portfolio can be a stressful experience for both the client and the adviser, and we want to help. We have developed our decumulation illustration tool to help advisers show the effects of retirement planning, specific to their client and how our CRP can help alleviate common retirement risks.