When providing advice to retirees, there are 5 questions which seem to frequently pop up. Drawdown can be a confusing proposition and shouldn’t really be attempted by the uniformed. There are considerations both in terms of investment risk and the correct strategy for withdrawing income.
In my experience, those who end up in drawdown spend months researching it themselves or seek the help of an adviser. So here I’ve listed the top 5 question I get asked.
Does it matter which drawdown provider I choose?
Many people look at the advantages of drawdown in the flexibility it gives. Both in terms of ability to take income when required and not being tied into the product, like an annuity. Any provider that offers drawdown should provide the same flexibility. The rules around drawdown are universal, there are however many variations between providers.
You should think about how you want to run your retirement income. There are providers who offer Guarantees and additional options but if you’re not going to use them, why pay extra for the additional features.
I always go through an exercise of asking my clients what they need, when and how they want to invest. The truth is, you can strip back the costs of drawdown if you’re only concerned about access and flexibility, rather than trying to have the best performing portfolio available.
In order to get value for money and a plan that suits you, it’s therefore vital you chose the right provider.
What are the ongoing costs?
With any investment drawdown plan there are going to be ongoing costs to consider. These vary widely from provider to provider and adviser to adviser. It can range from around 0.9% per annum to 3.5%. Unfortunately, there is no correlation between higher costs and guaranteed higher growth.
I like to discuss costs with my clients upfront and convert the percentages into pounds so it is fully transparent what the charges are.
I recently took on a client who was paying 1% to the adviser, on top of his 1.4% fund charges on a pot of £500,000. I find it frightening that an adviser can charge 1% on that amount of money. I managed to bring his charges down from 2.4% to 0.9% without sacrificing his investment strategy. It will save him around £7,500 per year!
How long does it take to set up?
First of all deciding on a drawdown plan shouldn’t be a quick decision. The funds you’ve build up have taken 40 years of disciplined saving. Care, thought and time should be given to their ultimate home.
Once you have made a decision or come to accept a recommendation from an adviser, it will usually take around 6 weeks to receive your tax free cash. The application will go to the new provider who will request the money from your existing scheme. This is what takes the time. The application for a transfer of funds needs to be checked, disinvested and then sent to the new provider. As money will be going out of their scheme, it’s obviously not something they rush. I have completed plans in 2 weeks but on average its 4 to 6.
What return can you get me?
This is a common question but unfortunately it’s not answerable accurately. No adviser or drawdown scheme should guarantee you a growth rate. The level of growth is determined by the level of risk you are prepared to take. The higher the risk the more the volatility. The larger the gains, but equally the larger the losses. The lower the risk, the lower the potential returns but this should limit your downside verses a higher risk fund. It is therefore worth thinking about what your downside limit is, or to put it another way, your capacity for loss. If you can’t afford for your fund to go down, you shouldn’t be looking at drawdown. If on the other hand, you’re not completely reliant on the funds you’re looking to put into drawdown you might afford to take more risk.
All drawdown illustrations you receive from a provider will quote 3 separate growth rates. For example, what the fund might look like if it were to grow a 2% at 5% and at 8%. You can factor in the income you’re planning to take and also the effect of the charges within the plan. This should be used to see your tolerance for different growth rates and income needs.
I work with my clients to understand what their income needs are and assess their risk. I will then qualify whether it’s realistic. It’s better to run through the scenarios upfront, rather than run out of money in a few years because there was no planning in place.
Can I lose all my money?
Drawdown is an investment, and with all investments they can go up and down. The chances of losing all your money, purely by a declining fund value, is very difficult if you stay to the main providers and their recommended portfolios. It is possible however.
The good news is that there are preventative measures you can put in place to reduce the likelihood of this happening. You should diversify your fund
- In different sectors
- And different asset classes
You should also try and diversify your investment house to keep fully protected under the financial service compensation scheme limits.
Spreading your risk in this way reduces the potential damage to your fund value should one area be exposed.
Losing all your money and running out of money are two different things however. If you’re making large withdrawal when the markets are declining, there a good chance your funds will run out sooner than forecasted. For this reason, it’s healthy to review your drawdown plan regularly so adjustments can be made.