The five questions advisers must ask when considering decumulation pots
There is a growing trend for advisers to take on more work themselves and manage the investments of their clients in retirement in separate pots, Thesis Asset Management has found.
The business notes that to help mitigate the risks of decumulation (sequencing risk, market drawdown, volatility, pound cost ravaging, inflation and longevity) advisers are using a long term pot which has a high level of risky assets to deliver growth and a shorter term pot which can be relied upon to deliver the cash to meet regular withdrawals.
Thesis believes there has been a real lack of innovation in the retirement space and as such the pots approach looks attractive for both advisers and clients. According to research clients are attracted to multiple pots with 79% happy to see their retirement strategy in multiple pots.
However, it can also be very time consuming to administer and introduces implementation risks for the client. As a result, Thesis has produced a list of questions advisers must ask before considering the pots approach:
1. How much and how long do you leave money in short term pots, what is the optimum time and amount?
2. How much is needed in equities for the long run to manage inflation and longevity?
3. Am I consistent with all clients i.e. is there a clear approach which all advisers follow?
4. How do I make changes for clients needing the same thing at the same time with and advisory model?
5. Do I want to have responsibility for big asset allocation decisions and if I do how do I implement it quickly, consistently and fairly for all clients?
Earlier this year Thesis looked to respond to these questions by launching its Managed Income Service – a unique decumulation portfolio service targeting the delivery of long term income while mitigating the dangers of investing in the near term.
Lawrence Cook, Director of Marketing and Business Development, said: “With pension freedoms now well embedded, there is much discussion about the best way to ensure we do not run out of money in retirement. While there are many options out there in the market for advisers and consumers, it is the pots approach that seems to be the most effective in addressing the risks investments face in the decumulation phase.
“The pots approach is in effect a method of providing some fire insurance in case the worst happens in the short term and leaving enough in riskier assets to ensure clients do not outlive their wealth. The challenge then is to mechanise the delivery of a service so that advisers can service more clients and clients can gain greater comfort that their wealth in retirement will last.
“We hope that our Managed Income Service is one way in which advisers can better manage the implement the pots approach and allowing them to focus on the financial planning needs of their clients.”