Reframing the conversation around decumulation

Educating investors around these issues can be problematic with advisers saying less than half their clients are fully engaged in taking a more active role in planning during the decumulation stage.

Therefore Quilter Investors invited a number of leading advisers to a roundtable discussion on the consequences of this new retirement environment.

Key to this debate is the need to preserve clients’ purchasing power by keeping up with inflation. During working life, salary increases effectively act as an inflation hedge but once clients reach retirement they will need to rely on canny investment strategies to do that work instead.

Anthony Gillham, head of investments at Quilter Investors, thinks that reframing risk in terms of inflation is important. “By looking to target a return above inflation it helps customers to secure an income in retirement that should increase in line with inflation and thus, maintain living standards,” he says.

“When you move into retirement, your objectives change. You are no longer trying to maximise your investment returns, you are trying to maximise the income that you can withdraw safely and to withdraw it for a given length of time from that pot. I think that does need a different investment strategy because fundamentally, the risks have changed,” he explains.

An investment strategy to hedge against inflation needs to be diversified and include some active strategies. The need for good financial advice at this stage and a structured financial plan is therefore key.

Jarrod Ellis, adviser at Delta Financial Management, explains: “We talk about having a safety valve, and I liken it to having a bath. Financial planning is [effectively] three pots. You have a bank account where you spend your money, you have a bath in the middle and then you have your investments. The investments need to fill the bath and the bank account slowly drains it. Rather than talking about [investments] in terms of cash flow modelling clients quite often like little simple pictures. That’s the thing and so you talk about filling the bath up. It’s that education piece [that is important] with the clients.”

Capacity for loss is another important concept for clients to understand and here the debate centres on being able to have a broad spread of other assets in the event of a financial downturn.

Petronella West, CEO at Investment Quorum, comments: “if you set your financial plan up in such a way that you’ve got other assets you can call on in a downturn then the asset allocation has done its job. This, as a concept, does not need to shift at retirement.” Pound cost averaging - where clients invest regularly over a period of time - is something that does change in retirement however. The key here is to carefully manage drawdown so that investors are not effectively forced to sell in a dip to fund the drawdown. Again a simple explanation of this concept is something that investors will value.

Ellis comments: “You just have to say, If you need a pound out, you take a pound out. But if the market drops you will take [out] an equivalent of £1.20, to get your pound.”

Being able to explain potentially complicated concepts in the way the end investor will understand obviously helps them to comprehend the risks and possible outcomes of the decisions they make. This has become even more important now that pensions assets have to work harder for longer and the balance between investment and drawdown has become an art that is finely balanced.

Ellis says: “Our job is to understand and interpret – that is where we add our value”

To watch the full roundtable discussion or to read more in this series please visit our website.  

'This is a Quilter Paid Post. The news and editorial staff of the Financial Times had no role in its preparation'