Income drawdown flexibility is paramount for many pensioners today, who want to be able to secure a certain level of income to fund a certain level of lifestyle.
Multi-asset funds, with a balance of growth and income-generating assets, can help to provide this flexibility. But how can this flexibility be matched with the needed inflation-beating returns and a measure of protection against inherent market downturns?
Alistair Byrne, head of European defined contribution investment strategy for State Street Global Advisors, comments: “Most retirees in drawdown need a fund that will provide a return above inflation, while protecting them from market volatility.
“A low-cost, well-diversified multi-asset fund will provide that. The diversification should reduce volatility, compared with equities alone.”
To do that, Mr Byrne suggests a composition of more effective diversification, and an efficient asset mix, rather than a focus on purely income-producing assets.
He adds: “Members can cash in units to provide the income they want. The fund should have some element of dynamic asset allocation to protect from losses in falling equity markets, which can eat into capital when withdrawals are being made.
"This is the so-called sequencing risk.”
However, there are dangers of drawing down too much income, especially in a high-inflation world where the pensioners’ pound must stretch further, and in a world where people are living longer.
Latest data from the Office for National Statistics puts the average life expectancy at 65 as 19 years for a man and 21 years for a woman.
According to the graph below from State Street Global Advisors, the effect of steadily taking 4 per cent plus inflation withdrawals from a £100,000 pot could vary significantly, from an optimal age of depletion of around 95 years old (the median), to 86.5 (the 5th percentile).
The longevity of that fund therefore depends on various factors, such as whether the person drawing down the pot in the early stages are likely to suffer an early, serious market shock.
The effect of this – the sequencing risk – on the remaining assets can not be mitigated by better performance in the long-term.
Therefore, any multi-asset fund that will be suitable for a drawdown strategy in the decumulation stage must be constructed with this in mind.
According to Paul Ilott, director, multi-asset research at Scopic Research, part of The Adviser Centre, the biggest problem facing people who wish to create income from regular capital withdrawals without depleting their investment is how to balance the requirement for capital growth, while avoiding damaging drawdowns.
He says: “Not enough growth, too high a level of capital withdrawal or a significant drawdown, requiring a long recovery period, could all be detrimental.”
There are, obviously, many ways in which using multi-asset funds for the core of a drawdown portfolio, can be a good strategy.