There is a need to improve income strategies for people already in retirement, but clients are only now starting to realise the problem of drawing down without having enough income growth, according to Robert Hird.
Mr Hird, head of investment strategy at advice company Premier Wealth Planning, says many of his clients had built their retirement plan around the idea of buying an annuity.
However, as their retirement date draws closer, they have realised how unattractive annuity rates are, and now want to enter drawdown and stay invested in retirement. But that necessitates understanding how that income in drawdown will be provided.
Mr Hird says this is part of the process of “client education” he undertakes as they approach retirement, so they are aware of the options.
Why is there a problem?
People have not saved enough capital to allow them to draw down and live off the income, and need advice on how to maximise their income strategies.
James Klempster, investment manager at Momentum, says we are starting to see a generation of people who are “chronically undersaved” for retirement, partly due to low interest rates.
He says: “The advice process has historically been about understanding the client’s capacity and willingness to take risk, but we are now in a world where it is about the necessity to take risk, and that needs to be part of future conversations with clients.”
The problem isn’t just that annuity rates have fallen to such a low level as to not be a viable option for most clients; government bonds, which have traditionally formed a major slug of retirement income, are also now yielding well below inflation.
- Many people have not saved sufficient capital to draw down and live off the resulting income
- A portfolio that is simply diversified across asset classes might not be the best way to boost income
- A multi-asset approach will blend a mix of assets tailored to individual client needs
This means the client’s journey in retirement isn’t merely from annuity to a portfolio of bonds, but one step further out from the risk curve to a portfolio containing at least some riskier assets.
But does that mean shifting into income-generating equities and chasing capital growth?
Mike Coop, investment manager at Morningstar, cautions against a retirement portfolio that is too focused on equities.
He says: “In the years of building up a portfolio, volatility is the client’s friend, as it means there are periods when you can buy the assets you want at a discounted price. But in drawdown, that reverses. Volatility is the enemy, and that’s why a multi-asset portfolio works best at that stage, as multi-asset acts to dampen that volatility.”
One big challenge faced by investment managers is that many of the assets typically owned for the purposes of capital growth, such as “value equities” have tended to underperformed in recent years.
The UK equities that have performed best have been those that pay an income, but are businesses with anaemic growth rates, and so offer little in the way of capital growth.