This is the third in our series of case studies designed to highlight particular ways in which Wesleyan’s smoothed With Profits Fund can help advisers’ deliver pragmatic financial planning solutions for clients. This month, Wesleyan highlights how With Profits can be used as a portfolio tool in supporting clients who are phasing their approach into retirement and taking an income in volatile markets.
Wesleyan run a version of their flagship With Profits Fund for the adviser market – the With Profits Growth Fund Series A. This version is specifically designed to sit on independent platforms thereby making it easily accessible to advisers and means the fund can easily be incorporated into a diversified portfolio.
Initially available on Novia, the fund is now also available on the Nucleus Wrap platform.
Satwinder’s story: Taking an income in volatile markets
Many people approaching retirement are having to think long and hard before taking the plunge, as they weigh up the impact of market uncertainty on the value of their pension pot, as well as the potential future impact of drawing down when markets could be falling.
Here, we look at the case of Satwinder.
In recent years Satwinder, 57, consolidated several historical defined contribution pension pots into a SIPP. Alongside her SIPP, she also has a company pension plan into which she is making and receiving contributions from her current employer.
Satwinder’s plan has been to reduce to part time hours at 64, before fully retiring at 67 when she qualifies for her state pension. She plans to bridge the gap between her full and part-time income by drawing down against her SIPP, whilst continuing to grow her current company pension plan.
However, recent discussions with friends and family have left her nervous about reducing her hours due to the potential impact of encashing units in her SIPP whilst markets remain volatile, and she is now considering delaying her part-time retirement.
Satwinder’s current salary is £32,000 p.a. Reducing her hours would leave her with an income of £17,000 p.a., meaning she needs to bridge the gap with £15,000 p.a. from her SIPP to maintain her current lifestyle.
Her adviser explains that she could achieve this by using a combination of her pension commencement lump sum (PCLS) and income from her SIPP. Her adviser will make sure this is structured in the most tax efficient way, based on all her circumstances.
Her SIPP is currently worth £400,000, split equally between a Multi-Asset Managed Portfolio and the smoothed Wesleyan With Profits Growth Pension Fund.
When drawing an income from her SIPP, considering the prevailing markets, Satwinder’s adviser will help her determine which fund is best to access to counter the impact of pound cost ravaging.
As shown on Chart 1, when markets are performing well, she may be best to draw down against her Multi-Asset Managed Portfolio. However, when markets drop, she may be better to draw down against the smoothed With Profits Growth Pension Fund, which could reduce the impact of pound cost ravaging during falling markets whilst offering potential growth benefits in rising markets.
How does the Wesleyan With Profits Growth Pension Fund reduce volatility?
With Profits funds can deliver consistent returns to help protect against short-term day-to-day fluctuations in value using a ‘smoothing’ mechanism.
Smoothing works by holding back some returns in times of strong performance and then using these to help cushion any fall in value in times of poorer performance. It’s a feature that ultimately means investors can worry less about the day-to-day ups and downs of the market.
Smoothing mechanisms vary in their approach across funds. The smoothing mechanism of the fund Satwinder is invested in – the Wesleyan With Profits Growth Pension Fund – is unique in that it is a daily priced, daily traded and daily smoothed fund, without the need for market value adjustments (MVAs) or unit price adjustments (UPAs). With the fund available via independent platforms (Novia and Nucleus), it means advisers can get instant valuation information for clients, and clients can access their investments in line with standard platform timescales, rather than having to wait days or even weeks.
The right With Profits fund, from the right provider, can also help address advisers’, and clients’ considerations of performance. For example, Wesleyan’s With Profits Growth Fund Series A invests in a mix of UK and international equities, bonds, property, cash and other assets resulting in a well-diversified investment. Because of Wesleyan Assurance Society’s financial strength, alongside lower-risk assets they can hold a significant amount of higher-risk investments. These, in turn, help to power long-term returns.
Ultimately, in combination with the fund’s unique smoothing mechanism, it means clients may simultaneously benefit from reduced volatility, while also working towards real growth.
Wesleyan has been helping people reach their financial goals for 182 years, and a large part of that longevity is down to the fact that they are a capitally strong mutual. Without shareholders, they have the scope to invest with a long-term approach, removing the pressure to pursue short-term gains. It also gives them the opportunity to control the amount of reserves they hold, directly impacting their financial strength.
A history of delivering consistent long-term investment returns means they are well placed to support the needs of financial advisers and their clients, especially in today’s challenging market conditions.