Income drawdown most popular way to access pension pot

More than half of people are likely to access retirement savings through income drawdown, according to the latest FTAdviser poll.

The poll, which was carried out by FTAdviser in association with Scottish Widows, asked financial advisers how their clients were receiving an income in retirement.

Income drawdown was the most popular, as 52 per cent of advisers said clients most commonly opted for this approach as a way to access income in retirement.

Some 22 per cent said their clients used a combination of an annuity and drawdown, while 15 per cent of advisers said their clients got their income from cashing in their pension.

Iain Petrie, retirement expert at Scottish Widows, said: “More and more clients are staying invested in drawdown during retirement and are also looking for income sustainability balanced against greater flexibility. This has led advisers to focus on developing sustainable withdrawal strategies which minimise risk, to ensure their clients do not run out of money.”

Steve Pennington, head of wealth planning at Arbuthnot Latham, said: “Drawdown provides an effective inheritance tax tool, as it provides the ability for the remaining pension funds to be passed down to a nominated beneficiary on death, where, if the deceased was under age 75, the inheritor will receive the fund tax free.”

Dennis Hall, managing director of Yellowtail Financial Planning, said: “Advised clients are more likely to be using drawdown because of the ongoing advice relationship.

“With poor annuity rates, clients will be looking for ways to obtain a better retirement income, and drawdown is the mechanism for doing this.”

But Jason Witcombe, chartered financial planner at Progeny Wealth, warned: “The real test for flexi-access drawdown will be during a sustained downturn in investment markets when some people, with hindsight, might wish they had opted for the certainty of an annuity.”

Only 11 per cent of advisers said their clients access their retirement income through buying an annuity alone.

Mr Petrie added: “The poll result shows that there is still a place for a traditional annuity, with a proportion of clients looking for certainty.”

 

The Single Most Costly Retirement Mistake to Avoid (and Why)

Nearly everyone has a dream for their retirement. It often includes leaving work while you’re still healthy enough to be active and independent, planning to buy a boat, or holiday home, or simply spending as much leisure time as possible. And after decades of dedicating most of your waking hours to your work, enjoying the fruits of your labour is a laudable goal.

The stark reality is that far too few of us fully reach our retirement dream, and for a variety of reasons. But when you get right down to it, the vast majority of Pensioners who don’t enjoy an ideal retirement failed to take steps that would have made a big difference. Frankly, they made mistakes that caused them to fall short.

But there’s one mistake above all others at the heart of people’s failure to achieve their retirement goals.  And that mistake is not starting early enough to contribute to their retirement savings.

Time really can be worth more than money

 When it comes to arriving at retirement with the most money, the best thing you can do is start putting away as much as you can as early as you can. It’s truly that simple. The difference between starting young and putting it off can be enormous.

For instance, if you started investing £100 per month in a fund that grew at just 3% per annum at age 20, you’d have about £93,000 at age 60, If you put it off until 40, that same £100 per month would be worth only around £32,000 at age 60. But here’s the rub.  That extra £61,000 would have been generated from only £24,000 out of your pocket.

It’s the extra years in the market that allows your money to take advantage of compounded growth and deliver the big payoff. If you delay to age 40, you’d need to kick up your contribution to around £285 per month — an extra £44,000 — to arrive at retirement with a similar balance.

Time smooths out your returns

But it’s not just about the power of compounding growth. The longer you invest and regularly contribute, the better your odds of capturing the best returns. The market has its ups and downs, and it’s impossible to predict when they’ll happen.

If you start contributing early and regularly and invest through every part of every cycle during your working years, the law of averages will be in your favour. If you keep putting it off, waiting for the next crash, you’ll miss out on a lot of great returns.

Just imagine if you were one of the people who sold at the bottom in 2009 and sat on the sidelines for the past decade, watching the market more than double in value.

Even from the pre-Financial Crisis peak, the market has more than doubled in total returns:

By steadily contributing to your retirement investments for as many years as you can and through every kind of market, you’ll avoid the mistake many people made over the past decade: missing out on an historically profitable bull market while waiting for the next crash. At this point, even if the market falls by half, you’d still be far ahead of its 2007 peak.

Start as soon as you can (that means now)

Even if you’re not 30, start contributing as much as you can to your retirement savings now. Whether it’s maximizing the company contribution, or contributing to a Personal Pension, there’s no good reason to put it off.

The longer you wait, the more money it will take to reach your goals. It’s that simple.

Changes to the retirement income landscape

You will appreciate how much the retirement income landscape has changed in recent years by giving people and their advisers greater freedom. But with greater freedom comes greater responsibility.

Investment strategies that work in the accumulation phase (climbing the mountain) may not make sense in the decumulation phase (descending the mountain).

Drawdown gives people flexibility with their pension funds but it also brings exposure to all the longevity and investment risks that were previously borne by insurance companies and employer pension schemes.

Unless these are addressed, people’s pension funds are unlikely to last as long as might be wanted.

Unfortunately, not all advisers take decumulation into account and I know this because I have spoken to a number and was surprised at the lack of foresight by them.  The problem with using accumulation funds to take income is that you have to sell capital value shares to provide the required income.  If the investment funds then fall in value, they cannot recover as the funds been sold and are no longer part of the client investment.  Known as a double whammy!

And it’s an issue that could affect more and more people. Figures published by the Office of National Statistics in May 2018 show the number of people in England aged over-65 is projected to grow by 19% between mid-2016 and mid-2026.  I see no reason why Scotland should be very different.

In the decumulation stage, the strategies we employ will endeavour help to preserve your funds by using effective retirement income strategies for you as clients.

The Art of Managing Income in Retirement

Managing income in retirement has become a conundrum for our times, with advisers, clients and the pension industry all offering different ideas on the best way to solve the same problem.

It isn’t unreasonable for retirees to want the best of all worlds; flexibility, access and control over their retirement savings along with the reassurance that their money will last for as long as they do. But, what is the best way to deliver a consistent and robust outcome for every client in retirement?

Research has found that 53% of advisers said they adopted a centralised retirement proposition (CRP). However, when asked about when clients move into the decumulation phase and require income, overall 57% of advisers still used the same investment strategies, for both accumulation and decumulation.

However, the ongoing challenge that is facing advisers of clients who are moving from accumulation to decumulation in retirement, is one of finding a way to use products and investments to mitigate income volatility rather than a complete focus on capital volatility.

What is also clear is that decumulation in retirement brings with it a different set of challenges compared to the accumulation stage and maintaining the same investment strategy for both invites potential difficulties for both adviser and client.

Every client has different needs and objectives and we at ABFM have adopted, in most cases, a robust advice process specific to decumulation which allows for an investment strategy that can adapt to the post retirement rigors of pound cost ravaging and sustainability of income for life. A de-risked decumulation strategy also widens the focus for what lies ahead for retired later life, the vulnerability challenges, and changes to risk perception and capacity for loss.

Even those clients whom we have advised to follow a more traditional path, agree that a de-risked decumulation strategy will ultimately be necessary for them to follow.

We, as advisers, believe that we are at the centre of this revolution in retirement thinking because for most people, retirement will be a huge and important part of their lives, and as such needs the focus, consistency and surety that a decumulation proposition can offer.