The last few weeks have not been for the faint hearted. It has been 12 years since we’ve experienced such a dramatic sell-off across global equities, and for many clients this will have hit their retirement savings hard. Unfortunately, we may not be over the worst. We need to prepare clients for future volatility as businesses report their losses, and we face the prospect of global economic slowdown. Andrew Tully, Technical Director at Canada Life, discusses some simple strategies you can implement to protect your drawdown customers from future falls.
In some ways, drawdown clients have had it relatively easy over the last 12 years. Since the financial crisis of 2008, the value of equities has steadily climbed with very little volatility to speak of. Drawdown customers with the right investment and withdrawal strategy will have enjoyed taking an income with little or no impact on the value of their underlying fund. But recent equity falls have been a stark reminder that markets can experience significant volatility, and this will have been a rude awakening for many drawdown clients. Of course, this could just be a brutal over-reaction that will slowly correct itself over the coming weeks. But it would be naïve to ignore the fact that we may be heading towards a longer-term market correction.
Now is therefore an important time to take stock of your drawdown clients. How are they invested, what is their withdrawal strategy, and are there measures you can put in place to shelter them from some of the short-term uncertainty? Apart from keeping in contact and reassuring them that times like these will become a blip in the context of their longer-term investment, there are some other actions worth considering:
- Switch off unnecessary income
Now is a good time to challenge your clients on how much income they need to take over the next few months. They should consider reducing their income to save cashing in unnecessary units. They might also want to consider other sources of income, such as savings held in cash, until we have more certainty on how the coronavirus will play out, and the longer-term effect it will have on the global economy.
- Guarantee essential expenditure
For clients relying solely on their retirement income to cover their day-to-day expenses (versus still in some sort of employment), it’s important to have some guarantees in place. At the very minimum, clients need to be confident they will have a roof over their head, food to eat and the means to pay their bills. The State Pension is a useful place to start, but at a maximum of £168.60 per week, and possibly a lot less for some people, it’s likely it won’t be enough. One strategy is to estimate how much your client needs to cover the basics each month, take a portion of their pension savings and lock it into an annuity – ensuring they have the necessary amount of guaranteed income for life. Ideally, this would be an escalating income, to ensure it takes account of inflation. However after recent investment falls now may not be the right time for people to be buying an annuity.
- Consider a risk targeted fund range to manage sequencing risk
When it comes to withdrawing money from a pension, it’s all about timing. If your clients’ funds are taking a hit, but they are continuing to make withdrawals, it could take a very long time for them to recover the losses they are making. One way to manage this is to invest their drawdown pot across a risk targeted fund range (say a Portfolio 3, Portfolio 5 and a Portfolio 7). Set their monthly income to come from the lowest risk fund and then automatically rebalance the pot back to its starting asset allocation. This means they are less likely to lock in losses incurred within the riskier investments.
- Manage costs
With the cost of investing continually under scrutiny, it’s always prudent to review how much your clients are paying for the management of their underlying funds. Considering model portfolios, passive funds and risk targeted funds is a good place to start.
Protecting your drawdown clients from the longer-term vagaries of the stockmarket
Market uncertainty doesn’t sit comfortably with many people, and the catalyst usually comes from left field – in this case the coronavirus and a subsequent oil price war. Of course, it can lead to good longer-term returns if the right investment decisions are made, but first we must manage the short-term fall out which has a longer lasting impact on drawdown customers than those in the accumulation phase. As we approach earnings season we can expect to see further volatility as businesses report underperformance. There is hardly a country, a sector or a company that will not be impacted in some way, although we shouldn’t forget there will be a positive impact on some businesses.
You will undoubtedly be dealing with many anxious clients over the coming weeks and months. Apart from helping them to take a longer-term view of investments, now is the ideal time to address those concerns by finding ways to reduce risk, consider the most appropriate income sources and manage costs. A hybrid approach to retirement income is worth considering. It offers income guarantees and flexible income solutions all under one roof. Because the funds are in one place, the cost of this approach is more efficient than buying different products to do different jobs, and our Retirement Account is also underpinned by a fully comprehensive and cost-effective fund selection (which includes model portfolios and market-leading passive funds) that can be changed at any time free of charge.
If you would like support in reviewing the impact of recent market volatility on your drawdown clients, please contact your Canada Life Account Manager.
To find out more about The Retirement Account visit canadalife.co.uk/adviser/retirementaccount or call 0800 912 9945.
Andrew Tully, Technical Director.
Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales no. 973271. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. MGM Advantage Life Limited, trading as Canada Life, is a subsidiary of The Canada Life Group (UK) Limited, and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales no. 8395855. Registered office: 6th Floor, 110 Cannon Street, London EC4N 6EU.