While someone building their wealth may have time to recover those losses over the longer term, for those already in decumulation, especially in the early years of retirement, these falls can be devastating and force them to accept a lower standard of living, change plans or even return to work.
However, for advisers to be able to take different approaches to decumulation that mitigate some of the specific risks faced while generating the income retirees need to fund their needs in later life, discretionary fund managers need to offer propositions that support this. For instance, portfolios that include both traditional and alternative assets, such as hedge funds, infrastructure, real estate and commodities.
Providing downside protection
While alternative assets can be higher risk than more traditional assets, they can be particularly useful in decumulation portfolios as they reduce the impact of any potential equity and bond correlation and may help provide downside protection and generate absolute returns during periods of stress to ensure income needs are met. Or portfolios that use guaranteed income as an asset alongside a managed portfolio.
By paying a guaranteed income for the life of the client, the guaranteed income part of the portfolio results in fewer assets within the managed portfolio needing to be sold to generate income, so they can stay invested for longer.
There is also greater potential for growth as it can be weighted slightly more towards equity and alternatives and slightly less towards bonds, without increasing overall risk for the client.
At the same time, platforms need to offer the functionality to support these propositions and enable further innovation while offering advisers flexibility and choice over tax wrappers and managing income.
It will be interesting to hear the FCA’s findings, but we already know that the retirement landscape is evolving with different pension models, changing working patterns and greater pressures on people’s income – both before and after retirement.
To address these challenges, retirement planning needs to evolve too, and along with it the solutions available to deliver income and mitigate the specific risks faced in decumulation to give advisers greater flexibility to meet the different needs of their clients.
Robert Vaudry is managing director of Copia Capital
