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DIY drawdown leaving savers exposed - how do you make your pension last?

Andrew Tully, pensions technical director, Retirement Advantage
Drawdown is a complicated business and our modelling work proves there is no magic solution or silver bullet.
Andrew Tully, pensions technical director, Retirement Advantage
  • Warning signs in an age of DIY drawdown, investors are left exposed to longevity, investment and capacity for loss risk
  • Financial advice key to ensure retirement plans remain on track
  • New report exposes there is no ‘one size fits all’ investment strategy that produces an optimal outcome

Retirement Advantage, the retirement specialist, is warning that non-advised drawdown customers could be heading for the rocks as a new report suggests there is no magic ‘one size fits all’ investment strategy that works for the duration of retirement.

As the retirement market continues to evolve savers are increasingly choosing ‘DIY drawdown’ with relatively small pension pots, and consequently exposing themselves to a new range of risks.

Keen to understand how these risks and different retirement strategies might work to deliver retirement outcomes, Retirement Advantage commissioned EValue to stochastically model five strategies to see how different drawdown approaches perform.

The results have been published in a new report ‘Drawdown Strategies: The right solution for your clients’. The report considers if a particular strategy, or combination of strategies, consistently produces a better outcome. The five distinct strategies were: unit cancellation; unit cancellation with cash buffer; living off the natural yield or income; longevity tail risk; and annuity.

The core analysis was based on a 65 year-old with a pension pot of £200,000 (after tax-free cash has been taken), investing a mix portfolio of 60% equities and 40% bonds, targeting an income of £10,000 a year.

So which strategy produced the optimal outcome?

Andrew Tully, pensions technical director at Retirement Advantage, commented: ‘We’ve seen a significant shift to drawdown as people move away from the security of annuities. We’ve also seen a significant number of people shun advice and go down the DIY route. With this comes the responsibility for people to manage the investment, longevity and capacity for loss risk, any of which can seriously put plans off track.

‘Drawdown is a complicated business and our modelling work proves there is no magic solution or silver bullet. No one strategy combines the best of all worlds to create the ideal outcome and it may well be that a combination of approaches through retirement will work best.

‘Of course, people’s needs are rarely straightforward, and some may choose the highest income they can alongside access to their capital. Others may choose a fixed and guaranteed income but have access to their funds from time to time and protect their loved ones after their death.

‘Given the complexities involved, how do you choose the right strategy to make the most of your pension funds? Seeking professional financial advice is a critical first step. Not only will an adviser create the most effective drawdown strategy for your individual circumstances, but reviewed regularly as you go through retirement will ensure you can sleep at night.’

Some practical tips

  • Work out the income you are likely to receive when you retire. Include State Pension, any personal or company pensions you may have as well as any other savings
  • Make a budget of your likely bills in retirement. Consider inflation
  • Clear expensive debts as a priority
  • If you are considering buying an annuity to generate an income, never accept the offer from your pension company and always shop around for not only the highest income but also the right guarantees. Shopping around can improve your income by 30% or more
  • Think about how long you need your income to last through retirement and how much of this is guaranteed
  • You don’t need to use the drawdown plan from your current pension provider, you can also shop around to lower the charges
  • Financial markets, personal circumstances and needs change over time. Therefore your financial plans needs to adapt and evolve
  • Seeking regulated financial advice with regular reviews will ensure your retirement plans stay on track

To download a copy of ‘Drawdown Strategies: The right solution for your clients’, which includes detailed analysis of each strategy, click here: