Advisers urged to stress test income drawdown plans

Advisers urged to stress test income drawdown plans

A quarter of advisers do not carry out stress testing to identify clients’ capacity for loss as they go into income drawdown, research has found.

Prudential UK, which conducted the survey among 137 advisers who attended its series of webinar events on income drawdown best practice and cash flow modelling, warned that advisers who were not stress testing may not be giving clients enough information about the range of potential outcomes.

Colin Simmons, retirement expert at Prudential UK, said: "One of the biggest challenges advisers face when advising on income drawdown is determining if the client’s income is sustainable and what evidence can be recorded.

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"While cashflow modelling helps to paint a picture to clients of the potential outcomes, it is only one part of the process as the underlying advice process must also be robust."

Mr Simmons, who presented the webinars, added: "Stress testing is an excellent way of helping clients to understand their capacity for loss and importantly helps advisers document the client’s understanding as part of an evidence-based income strategy."

Minesh Patel, financial chartered planner and director at EA Financial Solutions, said he was surprised 26 per cent of advisers were not stress testing in any way.

He said: "It’s a responsibility for you to say, if the client’s fund falls dramatically and they run out of money to live on, that’s going to dramatically affect their lifestyle."

Mr Patel said stress testing and cash flow modelling were crucial in particular for clients "with less material wealth or investment capacity".

He also pointed to the Financial Conduct Authority and what it expects from the advice process.

He said: "The FCA now are looking much more overall at [whether] advisers are looking more in detail at the recommendations they’re making.

"There’s a big drive from them [the FCA] for advisers to be more holistic and more analytical about the recommendations [they make]."

Stress testing can include assuming negative return losses at different stages throughout retirement and looking at the impact of a lower long-term growth assumption.

Mr Simmons urged advisers to make sure any assumptions used in the cash flow modelling process was both "reasoned and reasonable", and that the underlying process itself was stress tested. 

He added: "Advisers need to consider the expected returns from the assets they are investing for their clients, perhaps by using stochastic models or anticipated growth rates provided by the investment manager."

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