The debate around how to generate sustainable retirement income has continued to rage this week. Pre-pension freedoms, this problem hardly existed: the requirement of a base level of guaranteed income before accessing flexible drawdown effectively excluded all but the wealthy. Lively debate brings issues to the fore and hopefully some more innovative solutions will emerge from the fray.
This week we published our research on how advisers and self-directed investors are managing their portfolios during decumulation. We’re seeing increasing focus on cash flow modelling and the widespread use of bucketing – more or less separate portfolios for short-, medium- and long-term income needs. Their drag on performance is more than made up for in their appeal to investors’ mental accounting instincts to put money in different pots.
From a product provider standpoint, solutions we expect to succeed in the short-term are those that fit neatly within those buckets (e.g. cash-like products for low risk buckets) or around them (e.g. retirement-focused MPS).
Long-term is less certain. Innovative solutions – such as in-pension annuities provided by Novia/Just/Spire or Canada Life – solve some of the problems faced with retirement portfolios, but they currently appear to be a bit avant-garde for many advisers. Solutions for long-term care are also in short supply.
Pension freedoms has dramatically shaken up the market for retirement products. It will take some time before the dust settles and a new credo emerges.