Managing income in retirement has become a conundrum for our times, with advisers, clients and the pension industry all offering different ideas on the best way to solve the same problem.
Retirees want the best of both worlds; flexibility and reassurance that their money will last. But how can advisers deliver a consistent and robust outcome for each client in retirement?
We undertook some research, to draw some conclusions on the art of managing income in retirement.
Days gone by…
The bedrock of income in retirement has been state pensions, defined benefit schemes and annuities. Britons have never had to confront the possibility of running out of money during retirement.
The pension freedoms introduced unfettered drawdown. Now people can take as much as they want. Royal London suggests that the majority (54%) of its drawdown plans have less than a 1 in 5 chance of sustaining current income levels for life[1].
The new ‘normal’?
Before pension freedoms were introduced, annuities dominated the pension landscape. In 2013, 90% of consumers bought an annuity[2]. Since 2013 drawdown sales have increased eight-fold[3], and it is difficult to deny that there has been a seminal shift.
Ascending vs descending the mountain
Investment strategies that work in accumulation may not work in decumulation. Capital is reduced and the time horizon is unknown.
Despite this, a 2016 survey of New Model Advisers top 100 advisers revealed that 86% offered the same Centralised Investment Proposition (CIP) to both pre and post-retirement clients[4].
To clarify this further we commissioned research to:
- Understand why advisers who don’t use CIPs and Centralised Retirement Propositions (CRPs) take this approach.
- Explore whether advisers that don’t use a CRP still take into account certain factors in developing investment strategies for their decumulation clients.
Our research found that in accumulation, the split was 47% using a CIP for their clients, with 53% using a bespoke approach. However, when clients require income, overall 57% of advisers still used the same investment strategies, for accumulation and decumulation.
What makes a Centralised Retirement Proposition?
When asked about CRP, 53% of advisers said they adopted this approach. The reasons cited were it provided time savings and consistency of outcome. For those that didn’t, the reasons where that one size didn’t fit all.
This led us to explore the factors that advisers consider for decumulation, comparing those advisers that use a CIP, or bespoke approach, against those that use a CRP for decumulation.
The results were that the same three issues dominated, with sustainable income, attitude to risk and capacity for loss making up 61% of importance for those using a CRP, and 66% for those that didn’t. This tells us that advisers are focusing on the main core issues and that there are wide ranging approaches to achieving this.
This leaves a remaining concern – for advisers using a pre-retirement CIP for their clients’ decumulation needs, how broad are the range of assets being considered? A CIP wouldn’t necessarily include an annuity in the accumulation stage. And is there too much reliance on equities to provide the solution to every problem?
Delivering sustainability
If sustainability of income is one of the main concerns when providing income in retirement, then we need to examine how a guaranteed income for life can fit in.
