Retirement Income Investing
Until the arrival of pensions “freedom and choice”, accumulated pension funds would usually be converted into an annuity to provide an income. The regulator and HM Treasury certainly gave strong “hints” that this would be expected for anyone with a fund of less than £100,000, with income drawdown from continued investment really only for those with funds greater than that figure. Now, income drawdown can be used by anyone.
For pension providers and advisers, this is a game changer. Money which once would have gone out of the door to buy an annuity will now need to be managed, whilst an income is drawn from it. The investment strategies that were appropriate whilst building up the “pot” are unlikely to be the right ones in retirement, and some of the investment strategies designed for the annuity purchase of the past may need re-thinking. We are all entering a very different world here and need to think carefully what might be good for retirees to be thinking about, and what might not be so good.
What worries me slightly is that I’m seeing very little of this debate taking place yet. Product providers, as an industry, should be discussing among ourselves some possible approaches to the provision of income and the investment strategies that might support that. This is not to say nothing is happening. We are starting to see funds emerging geared to the provision of a reliably (no guarantees, of course) high income from investment in high-dividend companies, with potential capital growth thrown in. This is potentially welcome, but it’s just a start, and given the absolute wall of investible money appearing over the next 15 years or so as the “baby boomer” generation comes to retire, it needs to be as right as possible.
Much will depend on an individual’s attitude to risk, and capacity for loss, of course. Those who are seeking absolute certainty of income, are nervous of markets and are not interested in engaging with their investments may well be best advised to buy an annuity, especially if they are in poor health. Annuities can also, in some cases, provide better income levels than Defined Benefit schemes. One advisory firm I know is doing brisk business in this area, so do check. But all the indications I’m getting suggest that the “default” at retirement now is not annuity purchase, but to draw from the investment fund direct. More worryingly, it appears that many people with modest pension “pots” and no adviser are either doing nothing at all, or switching into cash, and drawing from that, neither of which are great ideas.
Conversations around the industry have shown there is no shortage of ideas around how best to invest for income in retirement, covering the entire spectrum of approaches. One commentator, whose thinking I have a lot of time for, takes the view that once income starts to be drawn, investment needs to be in risk-free or near risk-free asset classes as an individual’s ability to cope with any loss will, in his view, evaporate. Others advocate full market investment at retirement, gradually switching into lower risk assets with a “target date” of a middling life expectancy for completion of this manoeuvre.
There are many others. You may have your own preferences.
But the pensions world needs to give this rich panoply of ideas and approaches exposure to the light, so that constructive criticism and argument can start them on the road to seeing what “good” might look like in this brave new world.