More drawdown risks
Jonathan Cooper, head of paraplanning at Drewberry, also points to a wide range of drawdown risks, as he says: “Along with the usual risks associated with any investment, such as systemic, non-systemic, diversification, counterparty, interest rate and inflation risks, there are others to factor in, such as sequencing, legislative, political and tax risks. Clients should not enter into a drawdown arrangement lightly and should be aware of these risks.
“Drawdown is a balancing act between risks, desired investment returns and flexibility. Ongoing monitoring and professional advice to provide a dispassionate view on whether a drawdown route remains suitable and whether alterations to strategy should be made is essential, even mandatory.”
Ryan Medlock, senior investment development and technical manager at Royal London says: “Drawdown is and always has been a risky product. The Financial Conduct Authority has continued to stress its concerns about the suitability of drawdown advice and this remains one of its key priorities.
“In recent years, drawdown has increasingly become the default retirement recommendation, partly due to its flexibility around both income payments and inheritance benefits, but also as a consequence of annuity rates previously hitting all-time lows.
“There’s no doubt that staying invested during a rising market can deliver some short-term benefits for drawdown clients, but I dare say the market conditions we’ve experienced over the past 18 months won’t be what many clients would have originally signed up for and indeed hoped for.
“This, therefore, may be a good time for advisers to review and potentially re-set their drawdown advice processes. That doesn’t just mean where drawdown clients are invested, it means their whole framework for providing retirement planning advice. This includes re-evaluating their processes for fact-finding, assessing their retirement clients’ risk appetite and capacity for loss as well as managing sequencing risk, income withdrawal rates, longevity and, of course, income sustainability."
Medlock adds: “Some drawdown clients in higher-risk investments may never have felt the full magnitude of this level of market volatility before and may not have the capacity or inclination to tolerate movements of this kind again.
“For some, significant reductions in investment sustainability scores may bring about a need to re-evaluate risk appetite and capacity for loss, and this is where risk-profiling and income modelling tools can support client conversations. An effective and robust framework will mean advisers are better able to respond to market conditions and adjust income levels in order to enhance their clients’ long-term retirement income plans and help preserve their value.”
