We recently attended an investment forum. One of the discussions focused on the opportunities (if that is the right word) in the decumulation market.
What I saw as they discussed this was a crash about to happen unless there is a proper financial plan in place (whether this is done by you or by appointing a financial planner to help).
The baby boomers have only just reached retirement (2011 being the first year) and it is estimated that we will see £700 billion of assets move into the post retirement space over the next decade.
The presentation highlighted with increased longevity drawdown in retirement may be the only option to providing a sustainable income, as well as providing the flexibility and control that people desire.
To some extent I agree with this statement but there are significant risks with drawdown.
The first risk is that drawdown must be seen as the end solution. Financial planning is about identifying needs then drawing up the best way to deliver on those needs.
So for example, if I wanted £2,000 net in retirement then I need to look across all my investments to achieve that income. This will include my state pension, any income I can generate from investments (ISA income is tax-free, and “income” can be taken from non ISA investments potentially tax free where the CGT allowance is used) and I could also turn to my pension pot as well. I might also have other sources of income for example from a rental property etc.
Once I know all my sources of income I can look at the best and most tax efficient way to receive that income. So for example I might choose drawdown because I want to use the tax free cash to provide a tax free income but have the flexibility to switch on additional income if I need it.
So the first risk is seeing drawdown as a product when actually it is one part of the overall solution.
The second part which I found interesting was the risk of volatility. The argument was that greater volatility in a portfolio will eat into the value quickly even if the end performance is better than a more cautious portfolio.
The extreme example they used is shown below (using high volatility):
| Portfolio 1 | Portfolio 2 | |
| Return sequence | 27%, 7%, -13%…… | -12%, 8%, 28%…… |
| Average return | 6% p.a. | 7% p.a. |
| Volatility | 20% | 20% |
| Ruin age | 94 | 84 |
Data is illustrative only – examples start at age 65 and assume 9% income is drawn per year and the portfolios have a repeating three year return sequence as shown above.
The point is that financial planning is not just about identifying the income needed and the solutions to deliver that need but also about building a portfolio which exhibits low volatility, avoids large short term losses and has the ability to generate sufficient growth
The danger or risk of going direct is that unless the investor understands about portfolio design and make up then they are in danger of creating an extremely volatile portfolio which won’t help them in retirement. Equally if you have a financial planner then you should be asking for data that demonstrates that the portfolio you are in is operating in the way it should.
With £900 billion at stake this is not an argument for or against going direct or having a financial planner but an argument that good financial planning must be readily available so individuals can make informed and wise decisions in their retirement.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.