Please note past performance is not an indicator of future performance, investment returns can go down as well as up.
If you have clients who went into drawdown last summer, they’re likely to have some questions for you at their first annual review.
Let’s say they’re in a PIM Risk Grade 4 Tactical Active portfolio and taking 4% a year in drawdown income. With a 1% ongoing adviser charge and basic platform and DFM fees, alongside the global economic, social and political events of the last 12 months, they’re looking at a fall in the drawdown portfolio’s value of around 10%.
Considering that Tactical Active Risk Grade 4 has been our top performing portfolio at that risk grade over the last five years (see performance chart below and IQ for details), that’s quite a change.
Is being retired reward enough?
Their portfolio would have gone down whether they retired or not – but they would be at least 4% better off if they’d not taken any income. And maybe a little better off than that if they’d added to their savings from earned income. How does that the decision to retire look in hindsight – something to regret – or the best decision ever? One of the features of the post-pandemic world is that large numbers of people have left the jobs market(1). They are not alone.
Common sense money management
Few planners in 2021 would have suggested that their clients’ 2023 heating and lighting bills would be heading for £4,000, that petrol cost would have risen by 44% or that food would be 10% more expensive.
Planning for a world of extreme shocks and saving money to offset them is an endless process. No amount of capital can cover off every risk, even if we could identify them all. And no one wants to defer retirement for ever.
Control the controllable
A key element of everyone’s capacity for loss is their ability to reduce their outgoings. Anyone who remembers the 1970s will be getting out their heaviest jumpers in readiness for the cooler days to come. In lockdown, the streaming video and exercise bike markets exploded and are now in decline as people cancel Netflix, Mubi, Britbox and a string of other services. There is always something that can be done to ease the pressure on savings. The idea of retirement is for us to enjoy ourselves and that’s not all about money.
A drawdown case study
Andy retired at 65 on 1st July 2017 drawing £12,000 (4%) a year, with annual inflationary increases, from £300,000 invested in PIM Tactical Active RG4 with standard charges.
Q1: What’s the value of his portfolio as at 30th June 2022?
After 5 years drawings, charges and market movements, his portfolio would be worth £253,000.
Q2: What’s he likely to be drawing today?
With annual inflationary increases (using CPI as the inflation measure), Andy would be drawing £14,149 a year as at 1st July 2022.
Q3: What possible annuity income could he buy now that he’s 5 years older?
In 2017, Andy could have bought an annuity of £15,750. If he chose to annuitise at July 2022, now aged 70, his annuity income would be £17,724. with no inflation protection.
Q4: Could Andy have matched initial the annuity income and still generated a higher final guaranteed income?
If Andy had matched the higher level of initial annuity income from drawdown but not escalated his drawings with inflation, his portfolio would be worth £237,000 at July 2022 and that could buy an annuity, aged 70, of £16,572, around £1,000 above the level in 2017.
Let's talk retirement
We’d love to know what questions your clients are asking about their retirement plans. If you’ve got views to share or would like to know more about how we can support you, please get in touch with your RSM.
Patrick Ingram
Head of Strategic Relationships
(1) ONS, Reasons for workers aged over 50 years leaving employment since the start of the coronavirus pandemic, March 2022.
(2) Sharing Pensions, Annuity Rates, 2022
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.