Retirement in context

4 min read 29 Apr 20

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Adviser experiences: client retirement income

The retirement income market keeps on growing; it’s a core focus for many advisers and we wanted to better understand the broad spectrum of needs, priorities, risks and options for your clients and how you’re dealing with all that. In short, your retirement philosophy.

And what better way to do that than speaking with some of you? With a little help from our friends at the lang cat, we gathered views in a series of adviser case studies covering some of the most important aspects of retirement planning.

It was fascinating to hear about the various approaches – the similarities and differences – and we thank all our advisers for sharing their time and insight. Just one of the many nuances we found was in the varying approaches to helping clients take retirement income.

Here’s a snapshot of what they told us.

Sustainable income and withdrawal rates

When it comes to taking retirement income, one of the biggest differences in opinion between the advisers we spoke to was whether or not it’s necessary to establish a sustainable income, or withdrawal rate.

One adviser, whose firm has a centralised retirement proposition (CRP) in place, told us that sustainability of income was one of two key differences, alongside cashflow modelling, between their CRP and centralised investment proposition (CIP). This adviser also shared some insight on different income strategies:

"We have a lot of income strategies for retirement clients – we tend to base this around their attitude to investment risk and then look at capacity for loss. So, if they have a high attitude to risk then we’ll go down the route of drawdown and if someone is low risk, we’ll look at an annuity or hybrid product."

The same adviser pointed out that they didn’t go as far as to establish a sustainable withdrawal rate because they feel this takes away from focusing on what’s right for the individual client.

Another adviser we spoke to held a different view - that sustainable income wasn’t that important. Rather, when investing client money, they focus instead on total return:

"We think it’s a mistake to chase a high level of income in particular; currently it’s very hard to get that without going into high yield bonds or other risky assets. Accordingly, we try to create an efficient portfolio with the aim that some of that is income. Our portfolios typically produce about 6% p.a. and that would be about 2% income and 4% capital growth on average over the long-term."

However, this adviser did say that, ideally, they won’t withdraw more than 4% from a client’s portfolio each year. Most of their clients are taking around that level, although some may exceed it in the early years of retirement, particularly if they’re able to accept more risk.

Sustainable withdrawal rates could become increasingly important in the future, as another of our case study advisers pointed out, given the likelihood of lower annual returns over the next decade or so compared to the previous 20 years. The impact of the Coronavirus pandemic on global investment markets since we spoke to our advisers reinforces this view.

Running down by wrapper

Some of our case study advisers also talked through their process for taking income in more detail, highlighting varying but equally interesting and valid approaches.

One explained how they typically run a client’s pots down in order of tax efficiency.

"If the client has a GIA, we’ll generally run that down subject to capital gains tax (CGT) and then move on to something like bonds – whether onshore or offshore – then on to ISA and finally pensions. However, there are a lot of variables to consider which might affect these decisions along the way, such as the Lifetime Allowance."

Another adviser told us that they usually start by setting aside a capital sum, based on the client’s withdrawal rate, to cover the first few years’ income. Fixed income methods, such as State Pension, DB (defined benefit) pension or an annuity, then typically cover a client’s basic living expenditure requirements. Accessible assets are also used to “flex lifestyle expenditure in line with a client’s requirements as they evolve over time.”

The great retirement debate

Retirement income complexity makes it one of the biggest talking points in our industry. The adviser views shared here offer just a taste of the many issues we discussed within our case studies, including PROD, intergenerational wealth, capacity for loss, long-term care and sequence risk.

If you’d like to read more of our case studies, you can find the full versions here.

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