UK advisers demand more focus on decumulation

Eugenia Jiménez
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UK advisers demand more focus on decumulation

More than half (61%) of advisers in the UK believe that the pensions industry has not paid enough attention to decumulation while has focused too much on wealth accumulation, Heartwood Investment Management's research suggests.

The study also found that over 80% of advisers see this oversight leading to a significant increase on the number of clients seeking advice on this area over the next five years.

The growing demand for decumulation advice - the conversion into retirement income of pension assets accumulated throughout an employees' working life - comes as advisers warn of significant challenges facing clients seeking retirement income.

According to the study, advisers see the three biggest challenges in decumulation as managing market volatility (67%); calculating a sustainable income (63%); and longer life spans (55%).  

Conversely, 85% of advisers said that their clients entering decumulation were most concerned about the impact of a disorderly Brexit on their retirement portfolios.

Some 60% of respondents believed their clients over-estimated how much income they could safely withdraw from their investment portfolios compared to just 16% who said clients estimated approximately the right amount.

Practically all advisers (97%) said sequence-of-returns risk had a material impact on selecting an appropriate decumulation strategy. From this share, 38% described it as a significant impact.

Sequence-of-returns risk, if handled incorrectly, can have a catastrophic effect on the beginning of the decumulation phase when market lows combined with regular withdrawals can have a disproportionate effect on future income flow. 

Matt Hollier, head of Product at Heartwood Investment Management said: "Decumulation has traditionally played second fiddle to wealth accumulation in the financial services industry but this must surely change. Our study details the impact that tough headwinds can have on the growing number of clients entering retirement with less robust strategies in place.

"Sequence-of-returns risk - the risk of getting poor investment returns in the early years of retirement - can be critical for clients taking an income from their portfolio. Simply put, if markets lose money in the early years, and clients are withdrawing an income, then they have a smaller portfolio to benefit from when the good years come along.

"Conversely, if the early years are strong, clients have a larger portfolio so when the bad years come later, the poor returns have less of an impact. Advisers need to address this risk within their dedicated decumulation solutions."

Eugenia Jiménez
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Eugenia Jiménez

Eugenia Jiménez speaks Spanish and is Iberia Correspondent for Investment Europe covering Spain & Portugal, as well as Italy.