The nature and complexity of advice for clients with Defined Contribution (DC) pots is showing all the signs of becoming a discipline in its own right.
A significant amount of academic research and practical guidance is emerging from the US as well as the UK, with writers such as Abraham Okusanya contributing a huge amount to our understanding on the advice, challenges and opportunities surrounding longevity and expenditure patterns in retirement. In his new book, "Beyond the 4% rule", Okusanya provides detailed analysis on "safe levels of withdrawal", differing withdrawal strategies and the impact and importance of sequencing risk. Okusanya takes the various and complex strands of thinking that inform current "decumulation" planning and translates these into practical strategies that can positively benefit clients and the advice process that supports them.
It is now commonly accepted that modern financial planning, particularly for clients in retirement, involves an adviser essentially becoming a client's "mentor". This means they provide not only the structuring, in terms of product and investment strategy, but also act as a coach and offer invaluable guidance and reassurance throughout a client's retirement. On this basis, it is now more important than ever that client and adviser alike understand the "rules of the game", particularly if it is now more likely that a client's DC pot will never annuitise, that clients will be living longer and that the sustainability of their fund and income over time is of paramount importance. To be clear, the complexity of investment and withdrawal strategies, as well as the impact of tax, means that there needs to be a clear strategy, ideally "formalised" into a document that is signed and acknowledged by the client (and perhaps their wider family) with the adviser. This begs the question of why go to these lengths? Well, let's consider the following.
What happens if your client starts to demonstrate clear symptoms of cognitive disability? The onset of dementia is always an upsetting and deeply emotive situation. However, what is the adviser's position when it is clear that a client is increasingly unable to make clear decisions, or there are real doubts and concerns over a client's ability to understand what is happening around, and to them. If a formalised document (in the guise of a Portfolio Withdrawal Statement) has been drawn up and agreed at the very outset of a client's retirement dealing with this potential situation, the adviser has a clear pathway in terms of the framing of future advice and dealing with a client's wider family circle. Without doubt, advisers increasingly will be dealing more and more with Lasting Powers of Attorney for individuals in retirement, or perhaps working alongside an individual's "living will" which lays out how the client would like their financial affairs to be handled in the event of their mental incapacity diminishing.
Another area where this approach, I believe, helps the advice process is mapping out withdrawal and expenditure patterns for clients when their underlying investment strategy does particularly well, or enters a period of poor returns. In periods of market weakness and volatility, clients will naturally become nervous and concerned that their pension savings will ultimately not be able to sustain their standard of living, and indeed will be run down to nothing. A structure that allows for this contingency and implementing a timely plan of action can be incredibly powerful and comforting. For example, clear guidance that if a portfolio were to fall by X over a particular period would trigger an immediate review of a client's level of withdrawal and expenditure. Equally, the opposite is also true. If the underlying retirement portfolio experiences a period of strong returns, how does this translate into income and expenditure? Cashflow analysis remains key to all of this.
As discussed at the beginning of this article, "decumulation" advice is becoming a discipline in itself. Dealing with the challenges of sequencing risk, longevity and the health challenges of people living longer, combined with sustainable withdrawal rates and income sustainability, means that retirement advice cannot be a "set and go" strategy. The great work undertaken by practitioners and academics both in the UK and the US will continue to evolve, improving existing good practice. It is clear that advisers have a great opportunity to develop their respective retirement propositions based on the research and new thinking being undertaken, which can only be a positive development for clients and advisers alike and the future of UK retirement planning.
About LGT Vestra
LGT Vestra is a UK-based partnership between LGT and the executive partners of LGT Vestra. LGT is the world's largest Private Bank and Asset Manager owned by a single family, the Princely House of Lichtenstein, for over 80 years. Since 2008, LGT Vestra has offered a fresh approach to wealth management by putting advisers and their clients' interests first, providing a transparent service designed around what is right for each of them.
We provide advisory firms with access to a Model Portfolio Service (MPS), a discretionary investment service comprising six diversified portfolios. The portfolios have been designed to meet a range of objectives and risk appetites for your clients. In addition to our onshore MPS, we have a full range of offshore portfolios. The offshore MPS range is managed from our Jersey office and is specifically designed for clients who wish to hold their assets offshore.
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