There are numerous investment strategies we can employ with your pension drawdown policy – depending on your personal circumstances.
In theory, investing before retirement is very different to investing after retirement as we should consider reducing investment risk for older clients and aligning the investment strategy to planned income withdrawals.
There are many different investment strategies for drawdown, including:
- Investing in managed or multi-asset funds and selling units when income is needed
- Investing in high yielding funds and taking the running yield as income
- Short-term cash – mid-term safety and long-term growth
- Guaranteed funds and structured products
- Combination of annuities and drawdown
The more you think about investing for drawdown the more complicated it can become, especially when balancing the need for income certainty with flexibility and investment control.
Pension Drawdown Risks
It is easy to underestimate the risks associated with drawdown and overlook “crashes” like the dot com bubble crash in 2000 or the credit crunch in 2008.
Pension fund growth before retirement has time to recover from a period (or periods) of poor investment returns – as you do not need to withdraw any money from the fund.
After retirement, money is needed to meet income requirements which means we need to consider the “sequence of returns” risk.
Sequence of returns risk
is “the risk that investment returns are lower than expected or negative in the early stages of drawdown resulting in capital being eroded quicker than anticipated”.
This means that unless investment returns are higher than expected in the longer term, the drawdown fund may not be able to sustain future income payments or there is increased risk of lower income and in the extreme, running out of money.
There are a number of ways of investing in order to reduce or eliminate the sequence of returns risk and these include:
- Paying income out a cash fund and topping up the cash in good years
- Investing in ‘smoothed returns’ funds
- Using guaranteed funds and structured funds
- Reducing (or stopping) drawdown when returns are negative
How often should pension drawdown plans be reviewed?
In many cases, the success or failure of a drawdown pension plan hinges on the quality of the review process. We keep continuous eye on any changes in your:
It is important to review all the relevant personal circumstances such as health, family matters and any concerns they might have.
This is particularly important as clients get older and may be looking for more simplicity and structure with their financial affairs.
There are often two questions bubbling beneath the surface: Does the current level of income meet their needs? Should some of this income be guaranteed?
A good adviser will keep a watching brief on annuity rates and any changes in attitude to risk. If appropriate, converting some of the drawdown pot into guaranteed annuities.
This is the most important part of the review because investments have the biggest impact.
A structured review of the investment strategy should take place at least once a year to make sure it is on target to deliver the required returns and is in line with the stated attitude to risk.
We monitor your investments at regular intervals looking for any early warnings signs that the strategy needs changing in the light of global investment conditions.
Holistic Retirement Planning
Holistic planning involves taking everything into account.
The advantageous treatment of death benefits and their taxation gives rise to a number of IHT planning opportunities. It is possible that the Government may change the rules regarding this in the future so this could be factored into any advice given.
There may be scope for tax efficient retirement income planning. For instance, reducing income withdrawals if this brings income from all sources into a lower tax bracket.
The overall amount of investment risk need to be considered across all assets. For instance, if a client has significant savings in addition to their pensions, the exposure to risk across all investments should be taken into account, to ensure sure it is consistent with the overall risk profile.
We continuously review your investment strategy to make sure it is on track to achieve the required returns in line with your attitude to risk and is meeting the stated objectives.
We conduct reviews every 6-12 months to ensure the investment strategy reflects any changes in the economic and financial outlook as well as any changes in your personal circumstances.