Opinion  

With eyes on the election, how is pension freedom faring?

With eyes on the election, how is pension freedom faring?

With the election in full swing, one has to worry a little bit that things could be going very, very wrong with the pension freedoms and we simply wouldn’t know about it.

The eyes of much of the media, with a few noble exceptions, appear to be elsewhere.

At the same time, anecdotally at least, it appears that clients in the advised part of the market are proving remarkably sensible and, because they are sensible, are unlikely to get caught out by anything nasty. That is good news for investment advisers.

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But I would worry about the broader market. Exactly what is the state of affairs for all those who have stayed invested? For those drawdown ‘neophytes’, where is their money now? Has it been left with their old providers?

What exactly is their allocation and how appropriate is it? Has their employer scheme ‘lifestyled’ them into bonds over the last five years and is that a recipe for trouble if and when the Fed hikes rates or Greece leaves the euro and/or the UK breaks up after England decides to leave the EU?

What if there was a significant market correction and those retirees continued to take a big chunk of income out?

That is why I think Standard Life’s new head of adviser propositions, David Tiller, made an important point recently when he suggested to me that advisers should seek to establish formal withdrawal policies with their clients when they arrange income drawdown.

This would see clients agree not to take out a substantial income when markets were depressed, allowing the portfolio the time to recover. In fact, there would be a specific mention about what would happen in the event of a market correction.

“Once [the Government Actuary’s Department drawdown tables] are taken away, what definitely adds value is putting in place a formal withdrawal policy. Withdrawing money in a sequential way hugely improves sustainability,” he says.

This would also likely involve running different segments of money across multiple investment strategies, perhaps with short-, medium- and long-term goals, and with most withdrawals from the segment managed for the lowest volatility and the shortest term.

I understand that many advisers will already have processes in place that effectively do this. It may be specified or it may be implied in their process. But, as I say, I think formalising it makes a huge amount of sense.

Of course, the approach is definitely advice-led and does not lend itself to an obvious packaged solution, though Mr Tiller would also like to see advisers reaching out to more of the market, almost as a moral challenge, he says.

I doubt many of the execution-only services offer such strategic subtlety, though perhaps under the right circumstances they could eventually do so.