6 April came and went and incredibly, no one spontaneously combusted as a result of flexi-access drawdown-related over-excitement. While product providers and platforms were busy gearing up for the new opportunities presented by the pension reforms, some financial advisers were nevertheless reporting ‘business as usual’ to us.
Of course the reforms do have a substantial impact on the adviser community, and some of those that disagree may simply not be fully aware of their implications yet. But it’s true that for certain segments of the market, 6 April passed uneventfully. Advisers at the top end of the market were already managing drawdown portfolios for clients, and were not bombarded with requests for cash withdrawals. That said, they can get excited about the new possibilities for intergenerational planning: the potential to pass clients’ portfolios down to kids and grandkids free of inheritance tax. Growing the portfolio and managing it in the most tax-efficient way are paramount for such clients.
Other advisers have very different considerations for their (potentially new) retirement clients, who will need to significantly draw down on their portfolios to have an income in retirement. Pound-cost ravaging and capacity for loss are key concerns here; consequently long-term cashflow planning is coming more to the fore. Some firms are planning for a lifespan of 95 years, or 105 years; others are even looking into using a third party to underwrite their clients as part of their cashflow planning efforts.
In terms of the products advisers use to populate drawdown portfolios, advisers are wary of product innovation overkill. Some top-end advisers argue that they should simply aim for total returns from well-designed portfolios to meet any investment need – whether it is derived from capital growth or pension drawdown. Others distinguish between drawdown strategies that are based on the natural yield from sustainable income-related funds and feel that regular capital withdrawals add substantial risk.
A number of product types appear to carry an ‘approach with caution’ label in the drawdown context. Many advisers are concerned that very high yield funds eat into capital value to boost their income yields artificially. Bonds are also commonly seen as problematic in the current market climate, with some advisers picking absolute return funds as substitutes. Few advisers appear game for so-called third way products, i.e. products providing exposure to equity-based returns with guarantees of income and/or capital. They feel that guarantees come at too high a price – monetarily and potentially in regulatory terms as well.