Pensions  

Does decumulation need a shake-up?

With both political and economic concerns mounting – such as the continued uncertainty over the fate of the UK’s Brexit deal – there are fears markets could be set for a tough time this year, too.

However, sharp market movements can have their advantages, according to some. “If anything, volatility should be embraced,” says Mr Cook.

“By rebalancing on a regular basis from less-risky assets – such as bonds and cash – to equities, which as we have seen in recent months have undergone a significant devaluation, clients have the opportunity to buy at depressed values. This will allow them to experience the long-term gains associated with equities and give them a greater chance of not running out of money during retirement.”

Whether volatility is a feature or not, the task of keeping pace with inflation while continuing to draw an income will always need to be addressed. Mr Gillham believes particular types of asset are required to meet this aim, such as infrastructure equities and bonds.

He says: “It’s attractive because the underlying asset typically has some direct economic linkage with inflation. The best example is the cash flows that a railway might generate: they tend to rise with inflation because the fares are regulated, and governments will only permit those fares to rise year after year in line with inflation.”

Guaranteed comeback?

Annuities had previously been a staple of income for consumers reaching retirement with defined contribution arrangements. But increasing longevity and interest rate cuts to counter the 2008 financial crisis caused rates to plummet. Pension freedoms then added salt into the wounds of annuity providers.

This has meant that while annuity popularity has slumped, drawdown sales have soared. However, a complication with this shift has been that annuities and drawdown, despite essentially aiming for the same objective, have contrasting sets of risks.

Those that have sought advice are better positioned to understand and navigate these issues. But FCA data published in September last year found just under a third of both drawdown (31 per cent) and annuity (28 per cent) sales are conducted without advice, meaning consumers are running a greater risk of frittering away the pot earlier than needed when it comes to the former.

There are challenges for intermediaries, too, and there is little doubt that a new era of planning has begun.

Verona Kenny, head of intermediary at 7IM, says: “In many cases, advisers are now finding themselves in unchartered waters. Previously, many advisers would advise their clients to buy an annuity for certainty of income, but with the advent of pension freedoms, advisers now have an increasing segment of clients where decumulation strategies make more sense.”