De-risking retirement income strategies

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.

Many people think the best time to buy an annuity is when they are older. Of course there are situations when this is right, but there is room for a more diverse view. And that is to perhaps think of the annuity as an asset class.

Consider how much time is spent trying to recreate what an annuity does using investment to mimic the same level of security. Where this comes undone, is that annuities can generate income with no investment or volatility risk.

Use of an annuity allows the client to re-apportion their remaining equity holdings, and allows a more aggressive demeanor for pure growth.

Let’s be clear though, this isn’t suggesting that annuities are the answer for everyone. This is about how an annuity can be used to bolster sustainable income.

Forget 4%. Let’s get personal.

In April 2018 the Institute and Faculty of Actuaries published their report[5] on how a combination of drawdown and annuity could affect the risk of running out of money in retirement.

They concluded that the main factors that determined sustainability were the age at which a client entered drawdown and started to withdraw income. For example, a client aged 65 could withdraw income at 3.5% and would have a sustainable income.

Their findings showed that higher withdrawal rates were more likely to exhaust the fund and the client would run out of money between 85 and 95.

The Institute’s findings suggest there is a place for an annuity alongside an invested solution. There is no need for a client to give up all flexibility, and a secure underpin removes some if not all longevity risk.

Summary

It is clear that advisers are placing the highest priority on the issues facing clients in retirement; mitigating risk and preserving capital whilst delivering income.

However, the challenge is one of finding a way to mitigate income volatility rather than a complete focus on capital volatility.

What is also clear is that decumulation in retirement has a different set of challenges to the accumulation stage, and maintaining the same investment strategy for both invites difficulties that could be avoided.

Adopting a robust advice framework specific to decumulation allows for an investment strategy that can adapt and widens the focus for what lies ahead for retired later life.

Advisers are at the centre of this revolution in retirement thinking; retirement will be a huge part of most people’s lives, and as such needs the focus, consistency and surety that a de-risked decumulation strategy can offer.

Read our new Think article ‘De-risking retirement income strategies.’

Tony Clark

Proposition Marketing Manager

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

[1] Drawdown governance – how much income are people taking?, Royal London, June 2016

[2] https://www.moneymarketing.co.uk/issues/26-january-2017/annuities-down-but-not-out/

[3] Retirement Outcomes Review, FCA, July 2017

[4] New Model Adviser, How advisers are building centralized investment propositions, July 2016

[5] Can we help consumers avoid running out of money in retirement?  – Institute and Faculty of Actuaries, March 2018