Your IndustryFeb 26 2015

Alternatives to multi-asset for retirement income

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In particular with final salary schemes and others offering guaranteed annuities the income can also be extremely favourable relative to most alternatives and the equivalent cash value.

While some many reasonably seek to exploit the freedoms to get their hands on cash for a particular purpose, the regulator currently remains of the view that most transfers from defined benefit schemes especially are unlikely to be in the client’s interest.

Mr Parsons says the worry is that investors may not have access to the right information to help them make prudent investment decisions for their financial future. He says that is why it is down to the financial advisory community to step up and meet the surge in demand for pensions advice.

Where a final salary saver has pots of more than £30,000, full regulated advice must be sought before transferring. There is no such demand for those moving from a scheme with a guaranteed annuity, for example, but providers must highlight risks and signpost to Pension Wise guidance.

Outside of these secure income options, the core options sanctioned in law are new flexi-access drawdown, which is an ultra-flexible variable option that no longer requires minimum guaranteed income; or taking cash from the pot on an irregular basis or in full.

Those taking the cash in full may be doing so to go on a spending spree, but most prudent pensioners would likely be doing so to pay down debt or provide income outside of a pension environment, most likely through buy-to-let property.

This latter is expected to see major inward investment in the coming months and years; we Brits love the tangible asset property represents, after all.

But putting all your fund in a residential housing investment does bring with it liquidity concerns that mirror some of the old annuity drawdbacks. The tax implications of withdrawing your lump sum and then that arise when buying the house, are also an important cost consideration.

For drawdown (or the drawdown-style element of hybrid solutions such as unit-linked guarantees and other ‘third way’ products) or cash withdrawals, the fund remains investment. Mr Parsons therefore argues the top priority for advisers is solving the post-retirement investment conundrum.

According to Mr Parsons challenges facing investors are:

1) Most of us will live longer than we think. If you are 65-years-old today, Mr Parsons says there is a 66 per cent chance that you or your spouse will live past 90-years-old.

2) Higher inflation means lower purchasing power in retirement. Price increases in particular categories - notably medical care - tend to have a disproportionate impact on older people.

3) The hunt for yield continues as the squeeze on income tightens. Since 2007, average yearly council taxes are up 11 per cent; household electricity bills are up 30 per cent; the annual costs of running the family car and paying the family food bill are both up a shocking 60 per cent.

And thanks to record low interest rates, Mr Parsons says the value of £10,000 invested in cash 10 years ago would have lagged behind the rate of inflation by more than £2,000.

Thanks to years of low interest rates and rising income needs, Mr Parsons says many people face a real danger of falling short of their long-term financial goals, or quite simply running out of money in retirement.

For those seeking to take more control of their investments, while well-diversified multi-asset income funds provide a potential solution, Mr Parsons says there are a variety of alternatives including direct individual investing across a balanced mix of stocks and bonds to create a similar portfolio.

Investors can choose from a range of funds and asset classes to build a portfolio or provide an income in retirement, each with a varying degree of risk, says Vincent McEntegart, manager of the Kames Diversified Income fund.

Investment grade or high-yield bonds offer an attractive coupon versus government debt, Mr McEntegart points out, and look less risky to a degree given where the price of government debt has gone. Meanwhile equity income funds focused on the highest-yielding stocks are another option, with a varied portfolio offering some protection against any potential fall in stock markets.

Property also remains attractive despite an impressive run in 2014, according to Mr McEntegart, with many assets still paying healthy coupons to investors, while also offering the potential for capital growth.

Mr McEntegart adds: “An interest rate rise in future may also mean cash itself starts to pay an annual income above inflation, although it will likely be a number of years until rates are anywhere near where they were prior to the financial crisis when investors could easily get 5 per cent on their cash.”

According to Patrick Van de Steen, managing director and head of proposition at Hornbuckle, what we can expect to see going forward is target return performance that is less about pricey alpha generation and more about cost-conscious protection.

He says a decumulation portfolio is likely to consist of a combination of cash, low cost index fund(s) and volatility management.

Mr Van de Steen says: “Many would argue this beats most accumulation portfolios as well.”