How to prepare for decumulation amid a pandemic

A pension plan has to stay the course and the underlying investments should not be chopped and changed because of every market movement or every panicky headline.

That said, the financial effects of a pandemic were unknown to us – even the best stochastic modelling could only have estimated at the collision of two black swans back in March 2020 (the Saudi/Russia oil price stand-off and the spread of Covid-19).

Thankfully, most pension portfolio modelling has withstood the barrage of market drops and bounce-backs over the past few months, clients have generally held their nerve and their pension pots are mostly back to pre-pandemic levels (at least on paper).

The virtues of creating solid plans, avoiding incessant tinkering and understanding the long-term goals of a pension cannot be underestimated. 

However, it is important that regular reviews are conducted because even if the markets had not been shaken clients and their own circumstances may have changed significantly. 

As a result, what they may have wanted from their decumulation strategy back in 2019 may not be what they need from it now in 2021. 

Alan Chan, director for IFS Wealth & Pensions, explains: "Decumulation plans should always be reviewed regularly to ensure income sustainability anyway, but arguably it’s even more important now than ever.

"A robust financial plan will have been stress tested to account for instances like high market volatility caused by the pandemic, but clients’ lifestyle will have changed a lot during the pandemic, and may even change forever."

Clients' aspirations may have also changed, and perhaps [there is] a growing desire to bring forward some of their longer-term objectives. -- Alan Chan

This means that income withdrawals may need to be adapted and other assumptions, such as growth or inflation, may also need to be reviewed. Chan continues: "Clients' aspirations may have also changed, and perhaps [there is] a growing desire to bring forward some of their longer-term objectives, and they’ll want to know what’s feasible and what’s not."

Since the start of the pandemic, people have faced significant financial hardships, from government restrictions to stock market volatility and decreased employment prospects. These are just some of the factors weighing on pension savers’ minds when considering taking money out of their pension pot.   

According to Rob Yuille, head of long-term savings at the Association of British Insurers, it is more important than ever now to "go through the same processes as before the pandemic, to determine how best to access a pension".

He explains: "In the first instance, savers should try to use other sources of income to cover financial shocks as this will carry fewer long-term risks to people’s pensions. Also, pensions are typically invested in a range of assets; this means that over time, their value can go up and down."

As a result of economic output decreasing globally, it would be unlikely that pension values would not have decreased temporarily, so it is important to review.

Conversations about risk and return

This means some in-depth and perhaps even awkward conversations may need to be had in the near future. 

For David Stevens, savings and retirement proposition director at LV, such conversations are a 'must have', rather than a 'good to have'. He says people's decumulation plans should definitely be reviewed in the light of the potential impact of a pandemic.

According to him: "One thing the pandemic has done is to impress upon everyone just how unpredictable life is and how volatile investment markets can be."

Robert Cochran, retirement expert at Scottish Widows, agrees: "It’s now more important than ever to check that retirement plans remain on track or if any changes are needed, particularly given the market volatility in the last year.

"Even if we were not in the middle of a global pandemic, reviewing retirement plans should regularly be carried out as personal circumstances and market conditions are highly likely to change."

This is a point emphasised by Sophia Dimitriadis, research fellow at the International Longevity Centre UK. "The pandemic has made it more important for people to review their decumulation plans," she says.

"Many people may have, temporarily at least, seen the value of their pension funds fall, while others may have been forced to save less for their retirement because of the economic fallout from the pandemic.

"This means that many individuals may need to save more or work for longer than previously planned to achieve their target retirement income."

Dimitriadis adds: "So it’s a vital time to rethink how this will affect decumulation plans on an individual level.

"Professional financial advice could have a key role to play here."

Cochran also recommends considering assessing other risks of accessing funds ahead of retirement, such as the longer-term implications of triggering the money purchase annual allowance on future pension plans.

There is also the risk that decisions might not take into account longer-term retirement goals and objectives as well as short-term needs. As a result, he also agrees the need for advice "has never been more evident".​

The value of advice

Naturally advisers would agree about the role of advice in putting solutions in place to help forge a sustainable decumulation strategy.

Chan says: "For customers that are uncomfortable with volatile investment conditions, an adviser can help by sourcing low-volatility investment options to provide a return in line with expectations but minimising downside risk.

"For example, they can help a client pick the right type of smoothed fund to help ensure a sustainable income in retirement."

Ian Browne, retirement planning expert at Quilter, comments: "Clients are now going to have a much lower capacity for loss as they are unlikely to earn significantly again in their lifetime, and will have no time to recoup or replenish their savings.

"This also may mean that they suffer a shortfall in their retirement income due to a future loss of contributions and/or a need to access their pension funds earlier than they had originally planned."

He advocates advisers sitting down with clients whose decumulation plans may have changed to assess their attitude to risk, capacity for loss and cash flow, to "provide them with a clearer idea of what they can expect going forward".

After all, he explains: "This change in personal circumstances and priorities for a client will be reflected in their asset choices in decumulation, as they will be more focused than before on preserving wealth."

The pandemic has made it more important for people to review their decumulation plans. -- Sophia Dimitriadis

But Browne also advocates people not making drastic changes to their strategies. He says: "Entering into retirement is an emotive time for anyone, let alone in the midst of a global pandemic.

"Advisers can help clients to stick to their retirement plan and avoid a knee-jerk reaction to withdraw their money at this crucial time and help ensure their pension funds last longer."

Ultimately, the advice would always be: seek financial advice; if your clients have not contacted you, send them a gentle reminder about their reviews.

Tom Selby, senior analyst at AJ Bell, comments: "Regular reviews are absolutely key in drawdown, and in particular after a big downturn such as we saw in March and April last year.

"Anyone taking big withdrawals from their capital at this time will be at risk of pound cost ravaging and may need to adjust their retirement income strategy to ensure it remains sustainable.”

As LV's Stevens says: "Financial advice is one of the best ways to secure your retirement. Make sure you are invested in the right mix of portfolios and ensure your drawdown rate is sustainable and your holistic financial situation is being considered.

"Consulting a financial adviser will give clients a clear plan of what they are aiming to achieve; visualising when they might want to stop working; and the budget that they need to live on to enjoy the sort of retirement they want."

Therefore, it is important to get the message out that good financial advice can help people get the decumulation strategy right, despite all the distractions caused by the pandemic.

simoney.kyriakou@ft.com