Pensions  

Drawdown is not the panacea

This article is part of
Guide to retirement income

“Advisers should prepare their clients for sequencing risk by stress testing their retirement plans with cash-flow modelling. With careful financial planning, we show our clients how much of a loss their portfolio could weather in the year of review before it would impact on the longevity of their pension”.

McCarron adds: “Advisers can also use diversification of their portfolios to address the risk of drawdown. For example, in a ‘normal’ market with limited volatility, advisers may sell proportionately across a client’s funds to facilitate a drawdown; however, during 2020 we’ve held back between 2 per cent and 4 per cent, in each client’s portfolio to reduce sequencing risk and give some flexibility for ad hoc access without selling funds at a depressed unit price. A similar strategy can be achieved by having a lower-risk section of the portfolio.”

Clients might also consider reducing the income they take from drawdown, as McCarron observes: “Advisers should be having really honest, ongoing conversations with their clients on spending and income affordability as part of periodic suitability assessments and ad hoc conversations throughout the year.”

Churchouse agrees that reducing income can be a helpful strategy: “In some circumstances, we have reduced income to in part shield fund values, and this will be regularly reviewed to see if more positive changes need to be made in the future.”

Setting aside cash  

Gary Smith, chartered financial planner at Tilney Group suggests that keeping a sufficient cash balance can be helpful, as he says: “We can identify how much income the client needs to withdraw from their pension, each year, over the next three-five-year period. On the assumption that a client has a pension fund worth £300,000, and that they require £15,000 per annum income, they can retain £45,000 in the cash within their pension, leaving the remaining £255,000 to be invested in the markets.

“If markets fall, then the retiree has the option to take their required income from the cash portion of their savings, leaving the investment portion sufficient time to recover. In contrast, if the markets do well, then they could opt to take the growth made to generate their income, leaving the cash fund untouched.”

Not a ‘one and done’process

Whatever action advisers take to address the issue of market fluctuations and other risks, it is an ongoing task: “Income drawdown advice is not a ‘one and done’ process”, says Corliss. “The market outlook remains very uncertain and by committing to regular reviews, advisers have more opportunity to advise small changes to ensure clients remain on track to meet income and expenditure requirements.”