Blending existing products, as opposed to creating new ones, could prove to be the most effective route for income in retirement following the pension freedoms.
As the industry speculates over what product innovations might come in the wake of the pension freedoms, a mix of existing products could prove to be the most reliable way to generate income in retirement.
Managing income in retirement should focus on how various income sources align with objectives, such as ensuring that income growth keeps pace with inflation, that income will not run out due to longevity, protection from market volatility, flexibility to meet changing needs and uncertainties, and the ability to pass on something to loved ones.
Combining income sources, including a drawdown pension with regular withdrawals, an investment portfolio, fixed annuity with level income payments and/or annual increases, a defined benefit pension, and state pension, is one way to address these objectives.
Each income source carries its own risks and benefits, so diversifying increases the chances of a stable income in various market climates.
Richard Parkin, head of retirement at Fidelity, said of the challenges, “It’s less about new products, more about customer need and how we can use existing products to suit that need.
“In all instances we are focused on getting an income that is sustainable and grows in line with inflation. That’s the challenge.”
There are many different approaches to accessing funds in the new regime. When emptying the pot, the focus should be on withdrawing assets as quickly as possible while avoiding any unnecessary tax. This approach is appropriate for a client who already has other sources of retirement income and is looking to take a cash lump sum.
For those looking to leave behind an inheritance for loved ones, there need for income should already be sorted so that the focus of the sum can be on legacy. If the client needs to stretch their savings to create a retirement income until death, using the sum for a mix of income sources is a good option to increase diversification, decreasing volatility.
Advisers should also adjust the allocation within investment portfolios to suit the client’s needs. Fixed income offers low volatility, stable income generation, and low equity beta. Multi-asset income provides investors with diversification, flexibility through the investment cycle, stable income, capital preservation, and lower volatility and drawdown. Equity income offers medium volatility, scope for capital growth, defence against inflation, and a sustainable and growing income.
Eugene Philalithis, portfolio manager and team leader of fixed income and alternative research at Fidelity, highlighted diversification, sustainability, and flexibility in asset allocation as key means to deliver a reliable income over time. Investment objectives for retirement savings should not focus on delivering the highest yield, but on a stable return.
Turning capital into income requires focus on both volatility and yield. At an investment level, diversifying income sources is the key to creating sustainable real income.
