I was both surprised and dismayed to read a recent quote from research conducted by the lang cat and CWC Research, which showed nearly two-thirds (60%) of the firms they surveyed did not have a separate investment proposition for drawdown.

The reality is that investing for drawdown is quite different from investing for accumulation because there are different objectives to deliver against and different risks to manage – and it is wishful thinking to assume one solution should be used for both.

Sequencing risk is a key risk for at-retirement planning and can have a huge impact on the value of client savings when they are taking a regular income. Losses in the early years can be hard to recover and advisers should have in place an investment solution for their clients at retirement to help mitigate this risk.

Another issue is that rising average life expectancy means capital needs to grow for longer to meet the requirement for a longer lasting retirement income. So, on the one hand, risk is needed to deliver growth over a longer time period but, on the other hand, risk needs to be reduced to limit the impact of market falls. This is a fine balancing act.

Moving to a defensive strategy removes the significant potential benefits from compounding investment returns and so increases the risk of an income shortfall. This is where a well-diversified asset mix that retains some growth element can offer equity-like returns with reduced volatility and can really help to deliver a sustainable income.

These solutions are available in the market now from specialist pension providers – to pick an example close to home, Royal London’s Governed Retirement Income Portfolios have taken more than £1bn of drawdown assets over the last five years.

Drawdown is not just about the investment solution, however. Drawdown advice is an ongoing process that should help the customer understand what a sustainable income level looks like – how long they might live for, and, importantly, how the combined effect of income withdrawals and investment returns over time could result in an income that is less, or more, than they expect or can live with.

Real examples

The customer does not need to understand the technical aspects of the investment – that is the adviser’s role. They should, however, be given some real examples of how the value of their savings could change under different scenarios and how likely particular outcomes are compared with others. This is fundamental because a client needs to be comfortable the income they are planning to take is reasonably sustainable.

Our experience at Royal London shows that around two-thirds of drawdown customers have taken just their tax-free cash and then waited five years before they start to take a regular income. There is no reason to think our experience is not representative of the market as a whole and, if we consider pension freedom has only been around for a couple of years, then the reality is the real drawdown experience of taking a regular income is still ahead of us.

I expect to see many more providers deliver not just investment solutions designed for drawdown but also tools and services that help advisers to understand what a sustainable income looks like for each individual client, in addition to helping them monitor sustainability of income on an ongoing basis.

Income sustainability should really be at the forefront of every conversation about drawdown. If we can have investment solutions that are aligned and managed to how advisers review income sustainability, then I think we can truly say the drawdown market has evolved.

Lorna Blyth is pension investment strategy manager at Royal London