Final Portfolio Value
|Positive start||£115,563||Linear||£100,000||Negative start||£65,615|
How do annuities compare?
While sequencing risk can be addressed by avoiding drawdowns and volatility in a client’s investment, sequencing risk can also be addressed by a client having some flexibility with their income requirements.
However, for clients with little flexibility in their income needs due to a higher proportion of required spending on living essentials, an annuity should be considered as at least part of the post-retirement solution. For advisers, more advanced end-to-end financial planning software should enable comparisons between income drawdown solutions and annuity rates.
Finally, given how sensitive the client’s investment portfolio is to sequencing risk and their income requirements, the impact of costs can also be massive. For example, considering a withdrawal rate of 4 per cent for a client, once typical fees are added in for the underlying investment fund, platform costs, and adviser fees, this can effectively increase the withdrawal to almost 6 per cent each year.
The significant effect of higher fees is that a client’s pension pot will be more sensitive to sequencing risk and have a higher probability of not lasting to the client’s required time horizon.
Given this, it is important that all of these costs can be adjusted to accurately assess their impact on the client’s income drawdown goals.
A new way of working
All the above must be taken into account for advisers to be able to make suitable post-retirement recommendations. It is complex and there are a number of key considerations to take to ensure suitable advice is given.
Decumulation requires not only a different way of thinking, it requires the support of a financial planning software that powers and automates the heavy lifting. Modelling for Income drawdown not only models the situation but also allows suitable fund selection. Advisers need financial planning software and workflows that enable them to easily assess post-retirement client suitability and compare post-retirement solutions from multiple investment providers.
Traditionally, advisers have relied on disparate systems to research and create reports ensuring suitable advice for clients in decumulation. It is time that financial planning software responded to traditional challenges and provides new solutions. Disruption creates an opportunity for advisers to use technology to ease complexity and make use of a consistent methodology.
Within a single workflow, advisers should be able to assess their clients' risk tolerance, their post-retirement goals, compare across income drawdown funds and annuities to assess which can meet their clients’ needs, adjust for costs, and have each step of this process documented as part of making a suitable recommendation.