The period since the announcement of the retirement freedoms has been characterised by pension providers scurrying to create new products to exploit the new regime. The initial trickle is turning to a flood as the freedoms approach.
While those in the retirement markets have been frantically innovating, several in the investment space have simply pushed existing products, in the hope that their funds designed to provide an income can provide a solution to fund individuals’ retirement.
As soon as the freedoms were announced, concerns were voiced about whether people would frivolously fritter their entire pot on some expendable luxury. In reality of course, that is not likely. Those who have been responsible enough to save throughout their working life, are probably not going to suddenly become rash enough to blow the lot on impulse once they reach retirement. Anyone who does decide to take their pot is almost certainly going to choose to invest it, or at least some of it.
The logical place to do so will be in an income fund, whether closed- or open-ended.
As mentioned, several investment houses have been keen to elbow their way into the space. Big names in the fund management universe have hosted and attended a series of panels and debates on the subject, eager to present themselves as authorities and ensure their names are associated with retirement planning.
Other companies have launched new products, marketed to capitalise on the new rules. Threadneedle was among the first of these; as early as July last year, just four months after the budget, it unveiled a multi-asset fund, positioned from the outset as a retirement income solution.
The Global Multi-asset Income fund uses an active asset allocation to target high income with a relatively low volatility. Threadneedle did already offer a range of income funds, notably the UK Equity Income and Global Equity Income funds.
According to Toby Nangle, the group’s head of multi-asset, Threadneedle ran several simulations to examine how equity-focused funds would perform versus a multi-asset fund built to deliver comparable levels of total return while limiting downside volatility. These simulations ultimately led to the launch of the new fund.
Mr Nangle adds that the pensions industry has been slow to exploit the new rules’ possibilities, “The defined contribution landscape is still really trying to consider how it responds to the new pension freedoms.” He argues that many lifecycle default schemes are designed to ‘smooth’ savers into an annuity purchase but, “Schemes don’t seem to have quite yet decided how to redesign and what they smooth into, so we wanted to make this fund something that could be used by default DC schemes. As such we brought it in in a way that would allow it to be used within the new charge cap.”
This cap, limiting charges on AE default funds to 75 basis points, will prevent most retail income funds from attracting the masses, but there is nothing to stop sophisticated investors from taking their entire pot and using it to build an income-paying portfolio.