How to ensure clients have enough cash in drawdown

This article is part of
Guide to retirement income pathways

How to ensure clients have enough cash in drawdown

When it comes to advising clients in drawdown there are a number of factors, investment risks and strategies to consider so that clients can enjoy a long and comfortable retirement.

The risk of outliving their pension pot looms over many pensioners, their families and their financial planners, thanks to pension freedoms and ever-extending live expectancies, according to Heather Owen, financial planner at Quilter Private Client Advisers.

According to Ms Owen, three key factors come into play when it comes to drawdown:

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  1. How much money the client has in their pension.
  2. How much income they need.
  3. Where their money is invested.

She says: “As financial planners, we can help clients to grow their pension during accumulation, and we can help temper any unrealistic spending expectations to a degree. 

“But perhaps one of the key influencers is how drawdown funds are invested.”

According to Ms Owen, clients have a number of options for their pension fund.

She explains: “Buying an annuity will guarantee a set income, whereas holding funds in cash can make the longevity mathematics a lot simpler. 

“However, neither offer the chance for growth, and unless your client knows they are sitting on enough capital at the start of retirement to simply work their way through bit by bit – not forgetting the added effect of exposure to inflationary pressures – it is likely they will need to look for investment returns to help sustain their pot.”

She continues: “With an entire universe of things to invest in at our fingertips, where to begin? 

“It’s not as simple as saying 'anything that grows will do' – clients in drawdown may want to limit their exposure to particularly volatile and unpredictable assets, although some exposure would help to bolster and increase the size of the pot.”

She suggests some clients may seek income-paying assets such as gilts, corporate bonds, and commercial property, where they can draw the income generated in the portfolio.

“But again, if the client’s income needs exceed the income their fund can generate, the client may see capital depletion quicker than they would like,” she adds.

“Decumulation is a complex field, and there is no one-size-fits-all solution. The final investment decision will always come down to the client’s individual needs and circumstances.”

Sustainable income

According to Colin Simmons, retirement income expert at Prudential UK, one of the biggest challenges that advisers face when advising on income drawdown is determining if the client’s income is sustainable throughout their retirement, however long that might be. 

So when planning a retirement income strategy, it is important to establish a secure core level of income for clients through products such as a defined benefit pension, state pension, annuity or guaranteed drawdown, or by investing in lower risk, more stable investments. 

Then, on top of this, is aspirational income – or what the client wants to retire on – which is based around their own aims and objectives. 

He explains: “This is the income that has the flexibility (if required) to be adjusted and possibly reduced in the future.