Hybrid strategies (annuities): Annuities no longer offer good value for money as a retirement income aged 65, given changing demographics and lower interest rates.
The optimal point for annuitisation is life expectancy, meaning 85 or so in the UK. This is because annuities are not designed to provide insurance against outliving assets towards the end of your life, so should not be taken out when as young as 65.
By using annuities later in life, annuity rates are much more attractive (double-digit), and provide certainty around essential later life expenditures. By annuitising a portion of a portfolio aged 85, advisers can help clients lock-in a base income at a decent annuity rate.
To mitigate point-in-time conversion risk, advisers can consider “lifestyling” a portion of a portfolio to a mix of investment and a range of annuity contracts of different commencement dates.
Hybrid strategies (protection): By incorporating portfolio insurance strategies into an investment portfolio, there is scope for creating additional downside protection - to help mitigate the impact of sequencing risk.
Different profiles of portfolio insurance can be delivered in different ways - for example, by combining an asset-based strategy with a basket of autocalls, capital protected funds, or an alternative risk-based strategy, such as risk parity.
The specificities of these different combinations will vary widely - and each will have product specific advantages and disadvantages - but this is an example of the range of protection-style strategies for advisers to choose from to incorporate into a decumulation portfolio.
Applications
As advisers map out their centralised retirement propositions, it’s necessary to consider:
- How to assess suitability in retirement.
- The expected withdrawal profile (pot size, withdrawal rate, and time horizon) for a single or multiple range of retirement goals.
- The most appropriate liability-relative strategy.
When considering which liability-relative strategy is appropriate, advisers should determine whether or not there is a need or preference for hybrid solutions, and what solution will be most appropriate for a client based on life expectancy, capacity for loss, wealth level, service level and a trade-off between customisation and cost (value for money).
Henry Cobbe is head of Copia Capital Management
