It is now 20 years since legislation allowed income to be drawn down from pension plans without the need to buy an annuity.
Since that time there has been considerable focus on how much income could be taken from the fund: 120% of GAD rates, then 100% of revised GAD rates, then back to 120%, then 150% and now, a great vote winner, unlimited amounts.
But if the objective of drawdown is to provide income for life the one keyword that seems to be absent from all of these changes is sustainability.
Quite simply people want to ensure that their income does not expire before they do.
Back in 1995 a number of the early drawdown plans offered by insurance companies offered with-profits investment.
With reversionary bonus rates as high as 9% per annum, it looked simple to take the bonuses as a sensible level of income, leaving the capital intact. Some companies did not offer with-profits funds for drawdown, however.
‘How right they were’
They argued that bonus rates might fall – how right they were! They also drew attention to the need for market value reductions when the underlying value of assets was below the face value of the with-profits units.
So these companies introduced drawdown invested in managed funds.
These invested in cash, bonds, property and equities to provide the prospects for growth, but with downside protection. But they did not solve the problem of taking income when markets were down: while the fund included cash it was still necessary to take income from all of the fund thereby capitalising any losses.
The drawbacks of with-profits and managed fund drawdown led to a move towards SIPPs. A typical SIPP would hold a bank account from which income could be paid.
And SIPPs were designed to run on low costs, so they were no longer more expensive than insurance company funds. Significantly each portfolio could be varied to meet the individual client needs.
Everyone’s retirement is different, so everyone’s retirement portfolio should also be different.
Since Mr Osborne announced the pension freedoms there have been few new products, but there has been a plethora of new fund launches. And the fund of choice seems to be the ‘multi-asset fund’.
These funds include income producing assets with income targeted at around 3% of the fund. But which client wants only 3%?
From where I sit multi-asset funds are just managed funds coming back with a new name, and if I am right they will fail drawdown investors for the same reason that managed funds did.
One of the larger companies to launch a multi-asset fund says in its key features document that the recommended minimum holding period is five years, suggesting that the fund is not suitable for someone wanting immediate benefits.
They go on to say: “Before making any investment decision, investors are recommended to assess whether this investment is suitable for them in light of their financial knowledge and experience, investment objectives and financial or tax situation and to obtain specific advice from an investment professional.”
This is sound advice, and a warning to those who think that they can use multi-asset funds to manage their retirement income.
David Trenner is technical director at retirement income specialists Intelligent Pensions