For all but the wealthiest, generating enough income to meet wants and needs in retirement, is not straightforward. For advisers, building reliable strategies to provide that whole of life income is a major challenge.
ONS data shows a rapid shift in the coming years towards reliance on DC pensions – the effects of auto-enrolment and fewer DB schemes are clear. Advisers will have greater responsibility and should increasingly expect their retirement propositions and decumulation strategies to be put under the microscope.
Some clients will probably overspend and run out of money. But most people don’t want the anxiety of seeing capital they’ve accumulated over their working lives disappear too quickly. While the wealthy can rely on natural income, the rest will draw down capital and be more prone to sequencing risk. Some will underspend and live much less well than they could have.
Advisers will need to get much more efficient to cope with the numbers of reviews and the pressure on their charging levels. The use of technology, like cash flow modelling and asset allocation tools, will be essential.
The most prevalent advised drawdown strategy is a mixed asset portfolio from which to make regular withdrawals. However, almost half of advisers say that they use a bucketing strategy – running multiple portfolios or ‘buckets’ to cover short, medium and long-term income needs. Many advisers still recommend annuities, but current inflows are much lower than they were five years ago.
In a world of pension freedoms, advisers have huge new responsibilities, and many are still working out robust strategies to meet their clients’ needs. This presents an opportunity for asset managers and product providers who are able to understand and align with the adviser strategies that prove most popular.
We will be publishing our Decumulation Strategies report next week, looking at how advisers are recommending their clients invest to fund their retirement, which products are being used in decumulating portfolios and what innovation advisers want from the market. Get in touch for more details.