This is the fourth in our series of case studies designed to show how Wesleyan’s smoothed With Profits Growth Fund could help advisers deliver pragmatic solutions for their clients. This month, Wesleyan highlights how the fund may help with bucket investing for retirement.
Wesleyan runs a version of its flagship With Profits Fund specifically for the adviser market – the With Profits Growth Fund Series A. This version is designed to sit on independent platforms, thereby making it accessible to advisers at any time, and easily incorporated into a client’s diversified portfolio.
The fund aims to provide capital growth over the medium to long term by investing in UK and international equities, bonds, commercial property, cash and other related investments, while avoiding sharp rises and falls in performance by ‘smoothing’ returns.
Read on to hear how an adviser has worked with their client to use the Wesleyan With Profits Growth Fund as a key component of their retirement investment solution.
Robert’s story: Planning for a robust retirement income with a bucket investing strategy
As retirement fast approaches, its common to have one eye on our investments to see if they’re on track to deliver the income were looking for. This is the case for Robert, aged 63, who recently sold his engineering business and is retiring.
When it comes to income withdrawal strategies to fund retirement, there are many choices available to suit different needs – this one is focused on ‘bucket investing’.
Robert has pension savings of £600,000. He takes an initial tax-free lump sum of £40,000 leaving him with £560,000 of pension savings remaining, which he divides up into the following buckets:
- £60,000 into a cash fund, offering stability and predictability for income purposes.
- £70,000 into the Wesleyan With Profits Growth Fund, to have an investment with reduced volatility and growth potential.
- £430,000 into a higher-risk pure equity portfolio, to maximise his investment returns.
Robert is looking for an annual income of £30,000, initially all from pension withdrawals.
When he turns 66, he will start to receive his new State Pension of just over £10,000 so he will then need to take £20,000 income from his pension savings each year.
Robert’s adviser recommends he ideally takes his retirement income each year from his cash fund.
Assuming prescribed growth rates for his With Profits Growth Fund and his higher-risk pure equity fund, he recommends rebalancing all the funds annually, to enable his cash fund to be replenished each year from the gains of his With Profits Growth Fund and higher-risk pure equity fund.
This means his annual income can ideally continue to come from stable and predictable cash fund, as so:
- Year 1 = £30,000 from his cash fund
- Year 2 = £30,000 from his cash fund
- Year 3 = £30,000 from his cash fund
- Year 4+ = £20,000 from his cash fund and £10,000 from his new State Pension
Robert and his adviser feel optimistic about the potential returns from investing in the stock market but also understand the need to give those investments time to deliver.
Aiming to take his pension income solely from his cash fund, means Robert can leave most of his pension pot invested in his With Profits Growth Fund and his higher-risk pure equity fund for 5+ years, which is the timeframe his adviser suggests is best to establish the strongest returns.
Robert and his adviser will review his positions each vear and move money between the buckets to ensure there is sufficient income to draw down from the cash fund, whilst topping up the With Profits Growth Fund to manage stock market volatility, with the overall aim of getting the right balance between a sustainable income and growth.
A sustainable income
The Wesleyan With Profits Growth Fund is an ideal investment vehicle to support Robert’s retirement income. That’s because the downside of any uncertainty is managed through the implementation of a smoothing process. Gains are held back during periods of market growth and reinvested into the fund as markets contract.
This feature is significant for Robert as it means that in the event he wants to drawdown from this fund instead of having to sell a higher number of units from an investment that doesn’t use a smoothing process, he can realise the same cash value by selling a lower number of units from his With Profits Growth Fund.
With the fund offering daily pricing, trading and smoothing, if Robert needs to draw on this fund, he will know the exact value of his remaining investment. In addition, the fund sits on independent adviser platforms, so it is easy for advisers to seamlessly manage alongside the other investments that make up this strategy.
Retirement bucket strategy illustration
Robert divides his £560,000 retirement savings into 3 buckets.
Bucket 3
- £430,000 invested in higher-risk equities for 5+ years.
Bucket 2
- £70,000 invested in Wesleyan’s With Profits Growth Fund, to manage day to day market volatility, for 5+ years.
Bucket 1
- £60,000 in stable and predictable cash fund, to maintain c2 years income to draw from.
2 of the buckets are designed to be left alone for 5+ years to maximise returns from these funds.
Bucket 1 – his cash fund – is there to ideally provide him with a stable and predictable retirement income over this period.
The buckets are reviewed annually, and Bucket 2 is topped up from any potential gains seen from Bucket 3, and Bucket 1 topped up from potential returns from Bucket 3 and 2.
Benefits of the bucket approach
This ‘bucket approach’ is commonly used as an income drawdown strategy. It involves holding separate asset accounts, with each one covering different periods of retirement. The number of buckets and time periods is up to the investor, although a common number is three.
Robert is happy with this approach because it provides him with more confidence knowing he has certain assets and income sources set aside for his future expenses.
It’s an investment solution that appeals to his specific retirement needs.
What is sequencing risk?
When building his bucket strategy, Robert’s adviser explains the phenomenon known as ‘sequence of returns risk’. It is created by the combination of the ‘sequence’ in which returns are generated and withdrawals are made from a portfolio.
Sequence risk is a particular issue for those in the decumulation or drawdown phase of retirement because it could mean running out of money. Robert’s adviser explains that sequencing risk presents itself if his portfolio takes a major hit in the first few years of his retirement, which is where the bucket strategy can help.
Robert’s cash and With Profits buckets can provide an income over the first few years of retirement, so that he can avoid tapping into his other equity investments.
This approach could help to insulate him from market volatility, allowing his investments to ride out market losses while waiting for shares to potentially recover and maybe even generate growth later.
About Wesleyan
For more information about the Wesleyan With Profits Growth Fund, please click here, email or connect on LinkedIn.
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Please note that past performance is not a reliable guide to future performance and the value ot your investment, and any income can go down as well as up, so vou could get back less than you invested.
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