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The Retirement Bucket approach, but smoother

07/08/2023
RETIREMENT

One of the biggest worries for retirees is running out of money, or not being able to take income or use capital as and when needed. In the 12th edition of our quarterly Wealth & Wellbeing research we found that 44% of retirees wish they’d saved more into their pension. 

However, saving enough money is only the first step. The next step is managing the drawdown of pension pots to meet the client’s individual needs.

Sequencing Risk

Sequencing risk, or ‘sequence of returns risk’ describes the impact of poor investment returns alongside 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 you will find yourself having to sell more assets at a low 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 the last 18 months, showing a high of 4,377 and a low of 3,712 – a difference of 18%. If you were starting to sell assets and initiate drawdown in October or November of 2022, you would have needed to sell more in order to realise the funds, therefore depleting more of the client’s pot early on. This demonstrates the dangers of sequencing risk in retirement.

Graph showing FTSE share steadily increasing over time

How can you support your clients during retirement?

In many cases, a client has 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. For example, most clients might have three buckets.

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. The second bucket might cover five to ten years where perhaps they are becoming less active, and 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. Remember, this is just an example, and different clients may require different strategies. 

How to select the right assets for each stage of the client journey

If we follow the above bucket approach, 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, which the client would not need to access for about five years, might still be relatively cautious, but may include investments such as fixed interest, bonds or high income funds that have slightly more volatility. The last bucket is the furthest time horizon, so could comprise of higher risk investments with a higher percentage in equities than in cash or fixed interest.

When looking to build these separate buckets it is often easier to have them all in one place, rather than spread across a few different providers.

One of the most challenging aspects of trying to create a new bucket is 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 (bucket) of the clients’ retirement monies into a new investment vehicle 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.

Here you can learn more about the LV= TIP, including how to quote and apply.