After concerns about health, our research shows money (including not having enough money saved, or not being able to afford the lifestyle they want) is a top concern for consumers in retirement.
| Top 10 concerns | Total | Male | Female |
| Deterioration of physical health | 29% | 26% | 31% |
| Being able to comfortably pay the bills and day to day costs | 28% | 22% | 33% |
| I'm generally worried about the future financially | 26% | 21% | 30% |
| Not having enough funds or properly planned for my retirement | 24% | 19% | 28% |
| Deterioration of mental health | 17% | 17% | 18% |
| Not being able to afford to give up work and rely on retirement funds | 17% | 13% | 21% |
| Would need to cut back on luxuries (such as holidays, new car, home improvements and social expenses) | 16% | 12% | 19% |
| How I will fill my time and stay active | 13% | 13% | 13% |
| Won't be able to afford to help family and friends financially | 11% | 10% | 12% |
| Still paying off my mortgage | 11% | 9% | 12% |
LV= Wealth and Wellbeing Research, Edition 15.
We know the first part of preparing for the retirement a client wants; saving enough money. The next is managing how that accumulated capital is invested and drawn down to achieve that lifestyle and maintain longevity of the fund.
The impact of sequencing risk
One challenge to this is sequencing risk, which describes the impact of poor investment returns combined with the timing and size of pension withdrawals.
If the client’s retirement pot takes a large dip in value in the first few years of retirement as a result of stock market movements, then a higher proportion of assets will need to be sold at a lower price to realise the income the client needs. This leaves fewer assets remaining to benefit from the eventual market recovery. Where the market fall happens later in retirement, the impact is far less. However, fluctuations, and certainly bigger drops in the market, cannot always be predicted.
The FTSE All Share index, which is considered to be the best performance measure of the London equity market, has seen high volatility in recent years, as shown in the chart below.
If an investor held a FTSE All Share Index Tracker fund, for example, and started to sell assets and initiate drawdown in October or November of 2022, they would have needed to sell more units in order to realise cash, therefore depleting more of their pot early on. This demonstrates the dangers of sequencing risk in retirement.
The bucket approach – a recap
Most clients have an idea of what they would like their retirement to look like and, while certain things will be beyond their control, we can appreciate that there are a few phases of retirement, and things will change as the client gets older.
The bucket approach drawdown strategy aims to divide a retirement pot into separate buckets, each assigned for different stages of the retirement journey.
A three-bucket example
The first might cover the initial five years of retirement where they might still have a mortgage to pay, or perhaps their lifestyle is similar to pre-retirement life. You would first ensure the first bucket was easily accessible and low risk. Therefore, it might be partly cash, with some cash funds or similar assets.
The second bucket might cover five to ten years where perhaps they are becoming less active. It might still be relatively cautious, but may include investments such as fixed interest, bonds or high income funds that have slightly more volatility.
The third might cover year 11 onwards, when they are thinking more about how they can pass on wealth, rather than their own immediate income needs, so could be made up of higher risk investments with a higher percentage in equities than in cash or fixed interest.
Remember, this is just an example, and different clients may require different strategies.
One of the most challenging aspects of trying to create a new bucket is that it may not be in the clients’ best interests to separate or transfer existing money. A new provider might not be able to hold certain investments, and there may be dealing costs and time out of the market. In addition, it is often not possible to partially transfer a pension in drawdown.
An effective way of mitigating these challenges is a TIP. A TIP is a Trustee Investment Plan - a single premium investment plan for Trustees of UK registered pension schemes. One of the advantages of a TIP is that you can invest a portion of the clients’ retirement monies into a new investment vehicle (bucket) without having to transfer away, meaning they can remain invested and keep control of assets within the existing SIPP or SSAS.
The LV= TIP
Our Smoothed Managed Funds Trustee Investment Plan (LV= TIP) is a single premium investment plan for Trustees of UK registered pension schemes. By investing in the LV= TIP you can access a unique range of risk-rated, multi-asset smoothed funds, which have been built to suit clients with a range of different risk appetites and objectives. All of this can be achieved through your existing SIPP or SSAS without having to transfer away or in-specie.
Our Smoothed Managed Funds benefit from our unique and transparent smoothing mechanism, with averaged unit prices taking effect from day two of investment. The funds are designed to provide steady, medium to long-term growth, and to date* investors have not experienced any unexpected price adjustments.
If your client is approaching or in retirement, the LV= TIP could prove to be an effective option for one of their retirement buckets by providing a lower volatility investment journey, and therefore allowing for a steady drawdown of income in different stages of retirement.
Read more about the LV= TIP, including how to quote and apply.
*From launch to October 2024.
Please remember that past performance doesn’t reflect what will happen in the future. The value of your investment can go down as well as up. Our smoothing process helps to reduce the impact of market volatility, but it won't prevent your investment from dropping in value.
Any references to taxation are based on current rules upon publication and our understanding. These may change at any time.
