Why decumulation requires a different approach

Charles Stanley’s Tom Hawkins reflects on key findings from Alpha FMC’s recent report on decumulation which unveils diverse strategies for retirement income planning. Addressing regulatory demands and evolving client needs, Tom shares a fresh perspective along with practical approaches and solutions you can adopt to mitigate sequencing and longevity risks in retirement income planning as well as other key themes.

When the FCA announced its Thematic Review of Retirement Income Advice, Charles Stanley partnered with Alpha FMC to undertake some research on how IFAs currently manage decumulation to help the industry identify best practice. This timely report paints a very clear picture of an industry with several quite distinct approaches to meeting these challenges.

Drawing on Alpha FMC’s independent research, this report explores various retirement strategies, including systematic withdrawals, annuities, and tax-efficient approaches. e research identified several key themes.

The regulatory environment

 
 

As an extension of Consumer Duty, the FCA is keen to understand how advisers are balancing the robust processes that come with a centralised retirement proposition and target markets with individual client outcomes. It is more important than ever for firms to evidence how their retirement proposition and income strategies meet the needs of target markets and individual clients.

The opportunity is set to grow

The transition from Defi­ned Bene­fits (DB) to Defined Contributions (DC) pensions, demographic trends, and economic pressures will accelerate the growth in demand for more support and engagement throughout retirement. With the changing nature of retirement – with semi retirements becoming more usual – this presents opportunities for advisers to acquire new clients as the complexities of retirement increase.

The transition into retirement brings new challenges

 
 

Decumulation requires a fundamentally different approach to the accumulation phase. Going for a growth-oriented total return approach increases the risks of sequencing risk. is is particularly true in the earlier years of retirement when clients are more physically active and want to take maximum advantage of their new freedom.

Approaches and strategies

During the research, we discovered advice fi­rms taking very different approaches to retirement planning, which demonstrates the range of multiple options available to advisers today.

Centralised retirement propositions

 
 

Balancing flexibility with consistency is proving a challenge. How do advisers create robust centralised retirement propositions whilst being able to accommodate and support all their individual clients’ needs?

How Charles Stanley’s tailored income strategy can help clients achieve a sustained level of income in retirement

When designing an income strategy – be that for retirement or during someone’s working life – the two main risks are sequencing risk and longevity/inflation risk. Traditionally, advisers have taken two approaches to drawdown: a total return strategy and a high-income strategy. But both of these raise problems when we consider sequencing risk.

A total return strategy can leave investors highly exposed to sequencing risk. As you are relying on capital growth for part of the income withdrawal, day-to-day movements in the value of the underlying investments can have a serious affect.

Whilst a high-income strategy isn’t as directly affected, companies often reduce the level of dividend payments if they are struggling, which is usually reflected in a falling share price. And if bonds aren’t providing the desired returns, you might need to liquidate capital to make up the difference.

Our approach blends three strategies to answer three questions:

  • How do you provide sustainable income?
  • How do you maintain access to cash at short notice? and
  • How do you generate the right amount of growth for the future?

Short-term cash

This “pot” is used for any known short-term spending needs. We work closely with the adviser to establish how much needs to be held. It is kept in low risk, higher interest-paying deposits and money market funds. If a client needs to draw down from this pot, it is topped up by selling investments from the income enhancer or the growth pot when the right time presents itself. This is because the portfolio manager can sell targeted assets from the growth pot so they are not forced to sell proportionally from the whole portfolio during a falling market. This makes sure there is always enough cash available.

The income enhancer

This part of the portfolio provides a consistent and reliable level of income by investing in the Charles Stanley Monthly High Income Fund. Income distributions from this part of the fund can also be used to top up the short-term liquidity pool. We again work with the adviser to determine how much is to be invested in this pot based on the client’s income needs.

Long-term growth

The final part of the portfolio aims to provide the growth needed to protect the client from long-term inflation. The total-return strategy targets long-term performance in excess of CPI and invests in a diversified range of assets. e team is not limited in how it selects the most appropriate investments and can select from UK and international equities, government and company bonds, active and passive funds, and investment trusts.

This approach allows the team to move cash between the three pots to make sure risks and rewards are optimally balanced, and to make sure the right level of emergency cash is maintained.

Focusing on advisers

We believe this report represents a key research tool for advisers. Our aim in sponsoring this research is to support you by providing a comprehensive analysis of decumulation strategies, and offering insights into how you can effectively manage your clients’ assets during the withdrawal phase of their financial journey.

While many firms have a Centralised Investment Proposition in place, relatively few have a Centralised Retirement Proposition (CRP). Under Consumer Duty and the FCA’s Retirement Income Advice Thematic Review, a CRP is more important than ever before, and we hope all ­firms can learn from the best practices we’ve discovered.

To download your copy of the Alpha FMC report, scan or click the QR code below.

About Tom Hawkins

Tom is Head of Intermediary Sales and Strategic Partnerships at Charles Stanley, joining the group in September 2022. Prior to this, he worked at Quilter for 22 years where he held a number of roles, namely their BDM working with national advice businesses and networks, the Regional Sales Manager for the SW region and he also spent 4 years as their Head of Marketing. Tom is responsible for developing new strategic partnerships with ­financial adviser fi­rms in the UK to help them deliver standout investment solutions to their clients.

About Charles Stanley

For more information about how Charles Stanley can partner with your business, contact Head of Strategic Partnerships, Tom Hawkins on 020 3627 3990, or email tom.hawkins@charles-stanley.co.uk.

Important information

The value of investments, and the income derived from them, can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority.

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