She adds: “If in drawdown there are various ways of managing downside risk – for example only taking the ‘natural’ income of a fund, using a bucket approach where funds are earmarked to be withdrawn over certain terms (which can include a cash holding) or using a smoothed investment fund which helps to iron out the day to day fluctuations in asset values. None of these options are mutually exclusive.”
Grey follows a number of approaches:
Firstly, pure income solutions – an investment that throws off a yield and produces an income for a client.
This, Grey says, can be attractive and effective over the long term, but for most of his clients, the variability of income is an important disadvantage.
Secondly, there are investment products that are specifically designed to deal with sequencing risks – so called equity-glidepath solutions.
Grey says: “Both of these options have merit, and need consideration. However, they both have an interesting behavioural outcome for clients – namely that one might feel that the product gives a false sense of ‘protection’ for the client over time.
“For an income solution, a particularly good period of performance (rising capital and rising income) might encourage the client to spend more than they planned, rather than retain any excess for less happy times.
“For sequencing products, one might feel that the design of these products ensures success over the long term. I think we (at Sandringham) felt that remains to be seen, but it certainly didn’t seem to help clients make good plans for long-term growth, or shorter term spending.”
In building an optimal retirement income portfolio there are also important tax considerations to be aware of.
Taxing matters
McInally notes that while it is tempting or even necessary to take more income it could put the client into a higher tax band meaning their net benefit is diminished.
She adds: “It’s also important to consider using tax wrappers across all investments an individual may hold - this includes pensions, Isas, onshore and offshore bonds etc.
“In some circumstances this can significantly reduce the amount of tax an individual may pay. Some of these wrappers can be highly effective in producing income – it’s not only about pensions.”
Additionally, with the recent changes to the Capital Gains Tax rules and the halving of the CGT allowance (and again next year), investors need to be aware of the potential tax implications for making sales in their GIA portfolios to supplement the natural income produced with capital withdrawals.
Quilter Cheviot's Fox adds: “On the way in adding to your pension is tax advantageous, particularly if you are a higher rate or additional rate taxpayer. However, despite the recent tax changes, there are still limits as to how much you can add per year depending on your income so this is something to be aware of.
