Insights from Parmenion's Personal Finance Society (PFS) breakfast sessions
When it comes to managing retirement income, particularly for those in drawdown, the challenges are many and varied.
Early birds at February’s PFS Spring Roadshow in Manchester were able to join Investment Director Tim Willis and Retirement Expert Patrick Ingram for breakfast and an entertaining exploration of the complexities of drawdown investment and advice.
Patrick, drawing on his 15 years of experience with Parmenion and his history of advising large firms, set the stage by discussing his personal experience of being in drawdown.
Tim then elaborated on the strategies he and the Parmenion Investment Management team employ to manage sequence risk, while ensuring clients maintain enough growth to enjoy longevity with their funds.
What are full drawdown clients and how to segment?
A central theme in the discussion was the segmentation of clients into full drawdown clients. These are the people whose retirement income depends largely on drawing from their pension pot, rather than relying on secure, guaranteed income sources like annuities or Defined Benefit (DB) pension income.
Patrick argued that full drawdown clients differ significantly from traditional wealth management clients or those with large secure pension incomes. They need to make their savings last the duration of their life in the face of various retirement risks, including inflation, care costs, overspending, and longevity.
An essential first step for advisers is to assess their capacity for loss (CFL), making sure that the pension pot is adequate enough to support their income needs, even if they could annuitize it fully. Failing to do this could lead to significant risks - both for the adviser and client. Sequence risk (the danger of withdrawing during market downturns) in particular is ever-present.
Tim’s key investment strategy: protect against sequence risk
For ‘full drawdown clients,’ asset allocation for drawdown needs to be distinct from accumulation strategies. A retirement drawdown investment portfolio must account for longevity risk and sequence risk and it’s vital to maintain portfolio resilience under withdrawal stress.
Retirees who rely on withdrawals need portfolios that can withstand market fluctuations without eroding their capital too quickly. However, full drawdown clients need to maintain growth in their portfolios. The challenge is this: how do you mitigate sequence risk without dropping your equity content?
Parmenion’s drawdown strategy introduces funds that expose investors to equity volatility. When equity markets experience sell-offs, volatility increases, so a volatility fund performs well, providing downside protection.
This can help smooth the path for drawdown clients without compromising equity content, in a way traditional assets can’t, shielding them from major losses in the event of severe market drops.
Practical retirement planning advice and consultation
When deciding on retirement income strategies, advisers must carefully evaluate each client’s financial goals, risk appetite, and spending plans. Pat underlines the importance of realistic cash flow models, making sure clients’ expectations align with what their pot can realistically support.
In his view, advisers must be willing to turn away clients who won’t follow their guidance or who don’t have enough secure income to be in drawdown safely.
Let’s Talk Retirement
Tim Willis and Patrick Ingram will be back in action at the PFS Roadshow at the De Vere Grand Connaught Rooms in London on 27th February.
This event is fully booked but we encourage you to join the waiting list as places may become available.
Alternatively, if you’d like to discuss optimising retirement drawdown in more detail, get in touch with your RSM.
And for more insights on retirement and risk read Tim's Retirment Conundrum article.
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.
