Professional Adviser Research Income Drawdown & Portfolio Management
Post Retirement & Income Drawdown Portfolios, managed through Professional Advisers are supporting the growing needs for Retirement Income
For people in retirement there will be times, as in working life, when access to funds is more important than others. Similarly income level requirements are likely to vary over time. Therefore some flexibility in the approach to retirement income may be necessary.
The traditional way of providing for retirement is for a person to save over their working life, usually taking on some investment risk in order to potentially increase the size of the pension fund, with less risk generally being taken to protect the value of the fund as retirement approaches. Subsequently a secure income is then typically sought at age 60 or 65.
However, increasing longevity means that people are being forced to think differently about retirement, the length of which may now be almost as long as their working life. Also, whereas retirement has been seen historically as a rather one dimensional affair, there are now a range of life stages one may experience during 21st century retirement, each with its own unique income requirements.
Although purchasing an annuity is likely to remain a core option for many people approaching retirement, some investors feel that the fixed nature of annuity income renders this approach too inflexible. Different demands on assets at different times throughout retirement means a degree of flexibility may be required beyond that typically offered by an annuity.
An increasing number of financial advisers are now considering income drawdown as a potential recommendation for clients. Defaqto have therefore published a case study to assist advisers in this area.
Income drawdown may be a viable option for clients looking for the following:
- A living income
- Continued exposure to equity markets and potential for growth in the retirement fund
- Sufficient investment choice in order to achieve growth
- The ability to keep pace with inflation in order to protect the real value of income
- Flexibility to change income levels
- Flexibility of death benefit options for dependants
- Control of retirement income payment frequency
- The ability to continue to pay additional contributions in retirement (although no tax relief is available on any contributions paid after age 75)
- The ability to react to changing priorities and demands on retirement assets
Furthermore advisers who have potentially been put off drawdown by challenging investment markets (and hence reducing drawdown portfolios for clients) over the past three years are considering how to approach drawdown in a refreshed manner.
The control of investment portfolios, in particular the careful risk management that is required in Drawdown portfolios, has given further impetus to the use of Discretionary Fund Managers. Financial Intermediaries have been outsourcing investment portfolios to DFMs for some years, but the particular wealth preservation requirements, and low volatility needs of Income Drawdown cases is likely to increase the demand for specialist portfolio management.
In very simple terms, the management of portfolios for ‘’At’’ & ‘’Post’’ Retirement cases requires the delivery of income and growth in a lower volatility environment. As monies are being taken out of portfolios (to fund retirement activities), there are limits to the recovery periods that an investor will have to recapture their wealth should portfolios incur losses. If markets drop for a 30 year old client, they may have 30 years or more to recover the loss of wealth. Such recovery terms are not available within drawdown and post retirement cases.
To download a copy of the full Defaqto Research Report covered in this online research feature click the link: Income Drawdown Case Study
Last edited May 2013