More consumers are opting for income drawdown without advice, a study has warned.
Post-pension freedoms savers are increasingly choosing ‘DIY drawdown’ with relatively small pension pots and exposing themselves to a new range of risks, the report from Retirement Advantage said.
The pension specialist commissioned risk modelling firm EValue to model five drawdown strategies to see how different approaches perform and what levels of risk consumers are facing going it alone.
The report considered whether a particular strategy, or combination of strategies, consistently produces a better outcome and concluded there was no single investment strategy that could work for the duration of retirement.
Seeking financial advice was crucial for consumers to avoid “heading for the rocks”, they warned.
EValue and Retirement Advantage concluded there was “no silver bullet” for people looking to DIY plan their retirement.
Andrew Tully, pensions technical director at Retirement Advantage, said: “Drawdown is a complicated business and our modelling work proves there is no magic solution or silver bullet. No one strategy combines the best of all worlds to create the ideal outcome and it may well be that a combination of approaches through retirement will work best.
“Given the complexities involved (...) seeking professional financial advice is a critical first step. Not only will an adviser create the most effective drawdown strategy for [a person’s] individual circumstances, but reviewed regularly as [they] go through retirement will ensure [they] can sleep at night.”
The FCA's retirement outcomes review found consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5 per cent of drawdown was bought without advice compared to 30 per cent now.
In its research eValue considered the strategies: unit cancellation, unit cancellation with cash buffer, living off the natural yield or income, longevity tail risk and an annuity.
Its analysis was based on a 65-year-old man with a pension pot of £200,000 (after tax-free cash has been taken), investing a mixed portfolio of 60 per cent equities and 40 per cent bonds, targeting an income of £10,000 a year.
On unit cancellations - where units are cancelled when income is required - it found there was a 50 per cent chance the fund would last about 25 years to age 90, alongside a 25 per cent likelihood it would last for 40 years, and a further 25 per cent chance it could run out in 20 years' time. At this point there was a 75 per cent chance the fictional male aged 65 would still be alive.
Retirement Advantage said: “Overall, there is a reasonable likelihood that the fund could last a lifetime, but there is unlikely to be a significant legacy to leave behind in most cases.”
To adapt to changing circumstances an adviser might make changes such as reducing income, changing the investment strategy or annuitising part or all of the fund, it added.
Given the rigidity of the process, which made it difficult to manage periods of low returns, eValue tested its second strategy which used cash to mitigate the impact of poorer years.