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Advisers need better products for decumulation

There is plenty of room for improvement, and also a need for a high level of innovation in the market, argues Robin Powell

Robin Powell


Low-cost, evidence-based investment solutions have greatly improved outcomes for clients in the accumulation phase and it’s hard to overstate the transformation of investment solutions available to advisers over the plast 10 years. But there’s still plenty of room for improvement in outcomes for clients in decumulation and product innovation is now needed. 

A recent survey by NextWealth of more than 200 advisers showed widespread concern about the approaches and tools currently available for managing risk in decumulation. The vast majority of those surveyed said they were only “somewhat confident” of managing a range of risks including capital erosion and longevity risk. 

Traditional approaches have their limitations

Traditionally, there’ve been three main ways to provide clients with an income in decumulation. The first is to carry on investing in a combination of equities and bonds; the second approach is to use an annuity or guaranteed income solution; the third is smoothed market exposure.

All three strategies have their drawbacks as well as merits. The biggest problem with continuing to invest is the risk that falling markets will deplete clients’ capital so severely that they eventually run out of money. 

Now that interest rates have risen, annuities can be attractive to clients with smaller retirement pots. But crucially, they don’t produce any legacy value. 

Smoothed funds may also appeal to those with smaller pots, or those with a low risk tolerance. But they often lack transparency, and they also tend to be complex and expensive. 

Product innovation is needed

The good news is that there is, at long last, a high level of innovation in the market for decumulation products. The number of tools available to advisers has also risen, largely as a result of the normalisation of interest rates over the past two years. 

However, the industry believes there’s still plenty of work to do, including the urgent need for savers to be able to consolidate multiple pots in a simple and cost-efficient manner, and to access cost-effective pre-retirement and in-retirement advice and products relevant to their situation and relevant to the market environment.

See also: Advisers say economic climate prompting clients to change retirement plans

One of the main concerns of some is the need to address inflation risk. The adviser community has de-emphasised real outcomes in decumulation in recent years, which is largely because we have been in a zero-inflation environment. It is important to consider whether, and how, a retirement plan will address real-world inflation.

Some believe it’s possible, to allocate clients towards investments that may outperform in periods of high inflation — for example, commodities, property or inflation-linked bonds) — but there is no guarantee this approach will work, and the investor may take a lot of risk in the process.

The challenge with index-linked annuities is that the pricing becomes even more expensive than a traditional annuity, and the customer has to be confident that whatever reference index is used will fairly reflect their personal spending habits throughout retirement.

Are blended solutions the future?

However, market leaders also see an increasing role for solutions that blend features of drawdown and annuity together in an intelligent and dynamic way. Much like the basic principles of portfolio diversification, blending can offer a ‘free lunch’ in some circumstances from a risk- return standpoint.

Encouragingly, according to firms like FNZ, there has been a “marked change” in attitude towards decumulation among platforms in recent months, with a growing emphasis on improving functionality.

The firm recently conducted research with advisers around their approach to decumulation and there was a strong consensus that more could be done in the area of secure income products on-platform. 

The FCA’s Consumer Duty places a direct responsibility on firms to help customers avoid foreseeable harm, as well as help customers realise their financial objectives. According to the research, advisers are rightly turning to the market to ask ‘what tools and products can you give me to meet these requirements?’

See also: Advisers say digital wealth managers pushing them into retirement  

These new platform features may take a few more months to filter through to advisers, but help is on the way.

Advisers have a chance to shine

In my own conversations with industry colleagues, as well as improvements in on-platform functionality, some want to see the introduction of holistic approaches to decumulation that can be implemented within a Sipp. They also want better cashflow modelling, with an increased focus on tail risk and you can fully expect advisers to rise to the challenge.

The point of retirement, and arguably the years immediately before retirement, is where an adviser can really shine. Choices, costs and tax implications can be bewildering for clients, and mistakes at this point can be extremely costly. Explanation, looking at potential future scenarios and mentoring are all part of the adviser toolkit at this stage.

Robin Powell is an editorial consultant at Sparrows Capital

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