Multi Asset June 2017  

How pension freedoms boosted multi-asset investment

  • To understand why pension freedoms has affected investment choices.
  • To learn what multi-asset can do to help drawdown investors.
  • To ascertain the pros and the cons to using multi-asset in retirement.
How pension freedoms boosted multi-asset investment

Hundreds of thousands of savers have cashed in £9.2bn from their retirements pots since pension freedoms were introduced in April 2015, according to the latest government figures (from January).

So where has all this cash gone? The most recent data from the Association of British Insurers (see charts below) points to retirees shunning the restrictive but guaranteed income provided by annuities.

Instead, they have shown favour to the flexibility and ideally higher returns offered by reinvesting their money in funds specifically designed and managed to provide an income drawdown.

It is difficult to exactly trace the destination of reinvested pension money. But data from the Investment Association seems to suggest mixed asset funds are increasingly becoming investors’ asset class of choice. 

Table 1: Annuity sales by quarter (ABI)

Table 2: Drawdown sales by quarter (ABI)

While net retail sales of mixed asset funds have fallen over the last three years – from £4.7bn in 2014, to £3.6bn in 2015 and £2.6bn in 2016 – the latest Investment Association figures for this year point to a dramatic uptick.

Monthly figures show net retail sales have gone from £105m for March 2016, to £813m for Feb 2017, to £818m for March 2017.

By example, data from adviser investment platform Fundsnetwork published last month showed the mixed investment sectors continued to dominate its sales charts in April (see table below).

Top 10 adviser sales by sector via FundsNetwork (April)

RankSector Name
1Mixed Investment 40-85% Shares
3UK Equity Income
4Global Emerging Markets
5Mixed Investment 0-35% Shares
6£ Strategic Bond
7Mixed Investment 20-60% Shares
9Global Bonds

General investors jumpy about a range of political factors from Brexit to the UK general election seem to be looking for the relative defensiveness of the mixed asset sector.

It is not too much of a leap to suggest retirees looking for a safe harbour for their savings that will still give them an income to live on, are also looking to this sector.

Post-pension freedom solution?

So do multi-asset investments meet a specific need for people’s retirement post-pension freedoms that didn’t exist before – and if so, what?  

“Pension freedoms have greatly increased the number of people who will continue to take investment risk in retirement,” points out Chris Teschmacher, multi-asset fund manager at LGIM.

“High defined benefit to defined contribution transfer values have further increased this. Multi asset is a simple way for investors to allocate their assets for a given risk budget, benefiting from diversification and avoiding unnecessary concentrations of risk, and so it is likely to form the backbone of the investments for many people's drawdown assets."

A big investment loss is especially destructive for retired clients – they will generally have no more money coming into their retirement account but will have to continue to make regular withdrawals. This can lead to a real change in lifestyle. 

Nick French, head of UK wealth management and managing director at Russell Investments, says although everyone should be seeking to avoid losses, it is so much more important for retired investors. “Multi-asset diversification is a good way to do this,” he says.