But the temptation to withdraw into cash is a dangerous one. It places retirees at risk from inflation, the corrosive effects of which seem to be under appreciated. Rates on cash, according to the Bank of England, are somewhere in the region of 0.9%, while inflation is well above 2%, putting the real rate of return well in negative territory.
The answer for many people will be an investment solution that offers growth potential alongside appropriate downside protection.
Risk and rewards
For investors in the accumulation phase of their retirement planning, volatility can be a price worth paying for the opportunity to realise long-term gains. In decumulation, however, losses can be compounded when assets are sold during a downturn. This is the dreaded ‘sequence of return risk’ or ‘pound cost ravaging’ as it is variously known.
As the FCA paper notes “volatility is particularly important for drawdown consumers as they may rely on the income from their pot and so do not want its value to change too drastically”.
However, the regulator found little consistency in the risk/reward balance in investments used for decumulation, with around a third of the drawdown investments it analysed delivering a poor risk-reward ratio based on the relationship between performance and total charges.
The value of advice
Customers using an adviser confront these challenges with the benefit of expert support.
The report found more consistent and logical patterns in the choices made by advised customers in comparison to those not taking advice.
It says that: “While advised consumers seem to invest with a pattern consistent with their profiles, consumers that do not take advice do not. For example, investments in higher-risk assets, such as equity funds, increase for advised consumers in larger pots who have not made withdrawals. We did not see a similar trend for consumers without advice.”
It also found that 94% of non-advised customers stay with their incumbent provider when moving into drawdown, compared with 35% of advised customers, showing they are much more inclined to search the market for the most appropriate options.
What comes next?
The report shows there is still work to be done to address a number of emerging issues in the decumulation market. The FCA is taking steps now to tackle the number of retirees ending up in cash, and to encourage consumers to make more active choices at retirement, particularly where non-advised customers are concerned.
Where it has recommended changes, these will be adopted in rules (a policy statement) to be published in January 2019, with further consultation on wider concerns also due in 2019.