Since the introduction of pension freedoms in 2015 brought such big changes to the UK retirement landscape, the problem of decumulation strategies continues to be an ongoing challenge for advisers. Annuities have ceased to be the default choice at retirement whilst the flexibility offered by income drawdown means it has grown in popularity amongst advisers and their clients.
Of course, when it comes to drawdown, understanding the client’s personal circumstances, assessing their attitude to risk and capacity for loss are a key part of an adviser’s suitability process to ensure a client’s needs and objectives are met as fully as possible.
However, numerous other factors also need to be considered when a client reaches retirement. These include sequencing of return risk, income and expenditure requirements, estimating a client’s life expectancy and possibly calculating what a sustainable withdrawal rate could be, so funds are not eroded prematurely. As Income Drawdown is often a long-term commitment, advisers will usually need to undertake regular reviews with their clients to ensure the strategy remains appropriate. The adviser will also need to identify what is essential income, as well as what might be classed as ‘lifestyle’ or ‘discretionary’. Making appropriate investment decisions at this point is of crucial importance as there is no single investment strategy which is suitable to meet clients’ changing needs.
Assessing appropriate asset allocation
All of this may form part of an advisers Centralised Retirement Proposition (CRP). With a huge range of assets to select from, when it comes to considering an appropriate investment approach within income drawdown, one area which has proved a popular choice with advisers is the PruFund range. Reasons for this include the smoothed nature of the returns, the diversification its multi-asset nature brings and the predictability of the Expected Growth Rate (EGR) which helps to support the optimum retirement income in drawdown
Smoothing means that the EGRs reflect the long-term view of the funds growth and Unit Price Adjustments (UPA) allow any necessary adjustments to help keep the fund growth on track, in line with the EGR. This can be very useful when it comes to cashflow modelling to show a predicted rate of return, although stress testing will usually form part of this. Of course, there may be occasions where the smoothing process has to be suspended for one or more PruFund funds for a period of consecutive days, to protect the With-Profits Fund and the clients invested in it. The smoothing mechanism can help to iron out day to day fluctuations in the underlying values but will incur downward Unit Price Adjustments (UPAs) when there is a significant correction in underlying values. However, as markets return the values will also benefit from upward UPAs assuming the underlying values trigger the mechanism to do so.
Good to note that the value of any investment, and any income taken from it, can go down as well as up so your customer might not get back the amount they put in.
Do historic returns tell us anything?
While we know that past performance cannot be used as a reliable indicator of future returns, it is nonetheless useful to reflect on analysis of comparative historic returns within the PruFund range which Pru has carried out. Their analysis demonstrates that sustainability of income has been achieved using PruFund which supports the consideration of using such smoothed funds as part of a client’s income drawdown portfolio. Check out the full details of their analysis below.
To find out more about PruFund, please click here
Full details
PruFund since Pension Freedoms began – how has it worked? Download full details including past performance analysis HERE
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