Drawdown – don’t be behind-the-curve
In the immediate aftermath of pension freedoms the focus was understandably on the shift away from the straight jacket of annuities to the flexibility of taking cash lump sums or investing in drawdown. This has happened at such a speed that many advisers and their clients may now behind the curve when it comes to getting the best drawdown solution.
This begs the question; ‘are we doing enough to make sure people are getting the best solution’? If we are to avoid the pitfalls of the previous annuity focused regime, we must ensure that the mistakes of the past are not made in the past.
In my analysis, one of the biggest mistake in the past was that the industry was so wrapped up with the shopping analogy that many people ended up shopping for the highest annuity without realising they had other options. I agree not enough people shopped around and lost out, but how many more people are locked into low paying annuities without any flexibility because they didn’t realise they had other options?
It could be argued the reverse is true for drawdown; people are so wrapped up with the flexibility of drawdown they are not shopping around for the best deal. With annuities the best deal was easy to find because it is right driven but how people know what the best deal for drawdown is?
With any investment solution, the best solution is not necessarily with price or features but with the quality and suitability of investments. Drawdown is no exception and this means that advisers must go the extra mile to make sure the investment strategies they recommend for drawdown are aligned with their client’s objectives.
Practicing what I preach
As someone who both advises clients and writes guides on retirement income planning I am faced with the challenge of practicing what I preach. In my recent guide “The Retirement Journey – Questions and Answers”, sponsored by Prudential, I write about the importance of recognising that investing for drawdown is very different to investing before retirement and the dangers of sequence returns risk. So how do I incorporate my own words of wisdom into my advice process?
I have looked at many different investment solutions and techniques for managing sequence of returns risks and whilst there is no single right answer, there is general agreement it is important to sufficiently diversified portfolios that match the client’s risk profile and to make sure there is a strategy for taking income.
Finally, we shouldn’t forget costs. When income is being taken from a drawdown plan costs matter because the higher the costs and fees the less potential income that can paid. I used to think that higher charges for SIPPs and drawdown didn’t really matter because it only took a small amount of extra investment growth to more than make up for extra costs but I now I think differently.
This can be explained by looking at the 4% rule (I know there is a lot of debate about this but I will leave to this another time) where the income is taken is 4% of the value of the fund each year. It follows that 4% of a fund with lower charges will be higher than 4% of a fund with higher charges if the investment charges were identical.
In conclusion, drawdown is an investment solution so identifying the best solution involves looking at several different issues including investment portfolios, income strategies and cost.
At the end of the day, the difference between a good and bad solution may be less to do with product solution and more to do with the quality of advice but it helps if the best product solution is chosen.