Category : Pension drawdown

Am I paying too much for my drawdown plan?

Posted By: Phil Handley DipPFS AwPETR On December 7, 2018 Category: Drawdown Providers Pension drawdown

It’s one of the questions I’m most asked. Am I paying too much for my income drawdown plan? Is it good value? Is there a cheaper options out there?

There are many ways to take an income at retirement, but income drawdown has seen a surge in demand since the pension freedoms. Where annuities were once king, Drawdown has now stolen its crown.

The complexity of choosing a drawdown provider and group of funds hasn’t got any easier though in the last few years. Some say it’s become harder, with access to more choice and an evolving product range.

Many people have decided to try choosing and manage a drawdown plan by themselves, the DIYers. These people for the most part have some investment experience and can, therefore, understand the different products available and can maybe put together a diversified portfolio. However, for manyDIYers, this is the first venture into investment and can be somewhatoverwhelming.

Cost’s vary wildly for both the Product Provider and the Fund Management.

The Product Provider is the company who administers your pension. It’s the ones who send you your paperwork and provide online access. Typically, you should be paying no more than 0.25% for this, however the range can be 0.10% to 1%.

The Fund Management Charge is levied by the fund managers of your portfolio investments. Depending on who you chose these can range from0.10% to 1.75%. There are Active and Passive Fund managers, Tracker Funds and Prebuild Risk Rated Portfolios. Unfortunately, higher management costs doesn’t result in better performance.

On top of this there are adviser charges, again these vary but typically are from 0.5% to 1.1%.

The key to understanding whether you are getting good value from your annual cost outlay is not always immediately obvious. If the markets are going up, you might be happy, but if your funds aren’t going up as high as the rest of the market you’re losing out.

To understand whether your funds are performing better than the market average can be somewhat labor intensive, but a good place to start is Trustnet. Find your fund and look at the Quartile Ranking over the last 5 years. Quartile 1 means your fund has performed in the best 25% of similar funds in the market, Quartile 4 is the bottom25%. Look at where it has been over the last 5 years at various points. We’relooking for consistency here so one which has been consistently in the 2ndQuartile is better than one which is currently in the 1st Quartilebut has been in the 4th Quartile for the rest of the time.

If you fund isn’t performing, maybe it’s time to look for another in the same sector. Trustnet allow you to search for this and also provides information on annual costs.

To find a lower cost produce provider again can be overwhelming. There are around 100 providers of drawdown and they all have differing charging structures. Most have a tiered system whereby they’ll chargex% for the first £x and then x% for the next £x and so on.

The larger, more well-known providers tend to charge more. Standard Life, Scottish Widows etc are household names and they know it. Thereis a premium to be put on reputation and this is evident in their pricing.

There are many online SIPP providers however that offer much more competitive charging structure. SIPP tend to only charge for the parts andservices of the SIPP you’re using, which can help to reduce costs.

Another popular way to reduce ongoing costs is to stay in house. Many providers offer a prebuild portfolio from their inhouse funds. An example is the hugely success Royal London Governed Portfolio Range. TheProvider is Royal London and the Funds are Royal London’s. These are only currently available through the use of a Financial Adviser but typically you can have a managed portfolio for around 0.6% (not including ongoing adviser charges).

By keeping all the moving parts in-house, providers can offer a more cost-effective solution. Many of the more established pension companies offer these and more SIPPs are starting to offer this solution.

If you’re in a position that you feel your paying too much to your adviser and are not seeing value. Moving to a new adviser is both painless and can save you thousands. I recently move a client over to my and saved him £7,000 in charges per annum. He was so please he referred his friend who I also save £4,500.

The trouble with trying to determine if you’re paying over the odds for your drawdown plan is that there are many moving parts to measure. If you have the time to research the market both for products and funds, the information is all freely available. If you don’t have the inclination or time. My advice would be to find a good financial adviser. Understand their costs first and what’s they’ll do for you, then let them do all the leg work and come back to you with a proposition.

How To Navigate The Two Big Threats To Your Retirement Income

Posted By: Phil Handley DipPFS AwPETR On January 17, 2017 Category: Pension drawdown

Planning for retirement has never been easy, even for those with generous defined pension plans. You have rising energy prices and new taxes to contend with on one hand. On the other hand, the retirement years often bring an increase in health expenses. For instance, you may need to pay for supplemental health care if you have a chronic illness.

Those aren’t the only challenges you face. What if your pension benefits suddenly change?

Retiree Incomes Have Increased Since The 2008 Financial Crisis

In 2016, the Financial Times reported the average income of retired households has increased over 10% since 2008. In 2007-2008, the average income for a retired household was £19,262 – that figure has risen to £21,770. That’s good news for those who are retired today and drawing a pension. Since the 2010 decision to provide the “triple lock” pension guarantee, pensioners have been able to relax and move on with their lives. The triple lock guarantee states that state pensions will rise with the highest of: 2.5%, the inflation rate or earnings. In practice, this guarantee means living standards for retired households have held their ground.

The good fortune enjoyed by retirees stands in contrast to the working age population. According to Office of National Statistics (ONS) data, non-retired households have suffered an income decline. In the 2007-2008 year, non-retired households obtained an average income of income of £28,817 in 2008, compared with £28,481 in 2016. That’s a 1.2% decrease! The picture is even worse when you consider that inflation has made everything more expensive to buy.

The Two Threats To Your Pension Income: Government and The Markets

According to the ONS, two factors are responsible for the growth in retiree incomes: state pensions and the performance of the investment markets. If one or both of these factors are reduced, your retirement income will start to suffer soon.

State pensions are known for their reliability and security. The triple lock guarantee from 2010 improved the program to ensure that retirees were not left behind due to economic change. Unfortunately, a growing number of MPs and other officials are questioning the sustainability of the program. Is sustainability a real problem? According to the BBC, state pensions cost £98 billion pounds a year – a sum greater than the combined spending on national defense (£45 billion) and transport (£18 billion). Critics point out that current levels of pension payment impose a heavy burden on tax payers. Others point that paying generous pension benefits leaves less capacity for infrastructure, education and other public needs.

What can you do to address possible cuts to state pension benefits? Political advocacy – writing to your MP, voting at every other opportunity, and other related activities – is one option. Unfortunately, progress is uncertain at best with this approach as so many factors are outside of your control. For instance, the government has the balance paying pension benefits with other priorities such as the NHS. The limits of the political system mean you may want to focus your effort on investments.

Improving Your Income With Better Financial Decisions

Your personal financial and investment decisions make a tremendous impact on your retirement income. Some investors pulled all of their money out of the market after the 2008 crash and sat on the sidelines. That move may have felt good in the moment. However, it also meant that you have missed out on a tremendous amount of growth. If you’re uncertain about the markets, you’re far from alone. There’s nothing wrong with finding organizing your retirement income difficult.

There IS a problem with taking no action. If you simply coast along and hope for the best, your retirement income will suffer. It doesn’t have to be this way. You can seek professional advice to put your retirement income back on track.

What To Ask Your Financial Advisor At Your First Meeting

To make the most out of your first meeting with an investment advisor, take some time to prepare and ask good questions. Use the following list to get started:

1) Prepare a summary of your current investment assets (i.e. a copy of your account statements will suffice).

2) Estimate your current annual income needs by looking at your bank records for the past two months.

3) Ask the advisor what process they use to prepare a customized financial plan for each client. An excellent advisor will listen carefully and ask detailed questions before making any suggestions.


What does the US election result mean for my drawdown portfolio?

Posted By: Phil Handley DipPFS AwPETR On November 9, 2016 Category: Pension drawdown

As with Brexit, the markets were primitively shocked when the US electorate ignored the pollsters. Those with a drawdown pension may see some initial falls in their portfolios, but calmness is the order of the day.

Markets will be volatile in the short term but a well-diversified and managed portfolio will have looked beyond short-term geopolitical upheaval to concentrate on the fundamentals of company outlooks.

Duncan Rolph writing for Forbes, pre-election made this point.

“For investors, the best way to prepare for market volatility due to the 2016 election is to focus on broader economic trends in both the U.S. and international markets. Keeping a long-term perspective will help you make wise decisions and mitigate any risks to your portfolio. Remember that whoever is elected will last at most eight years while you are investing for the rest of your life.”

The effect of a US election to the stock markets has also been studied. The authors of the 2008 paper “Financial Astrology: Mapping the Presidential Election Cycle in U.S. Stock Markets” examined nearly four decades of stock returns and found that “U.S. stock prices closely followed the four-year presidential election cycle. Stock prices generally fell during the first half of a Presidency, reaching a trough in the second year, and rose during the second half of a presidency, reaching a peak in the third or fourth year.” (Social Science Research Network, October 2008)

If Brexit taught us anything, it’s not to panic and make knee jerk reactions. The morning after the referendum vote, global stock markets fell, but shortly afterward reflected that this wasn’t 2008 and rallied.

The same is true with Trump. Yes, there has been some scare mongering. A Trump victory had been portrayed by analysts as having the potential to unhinge markets. The rhetoric on the election trail pointed to an America shutting its borders, but lets not forget who is. He’s a businessman who wants to create wealth for the nation.

In his victory speech, he pledged to focus on rebuilding U.S. infrastructure, creating thousands of jobs

“It’s time for America to bind the wounds of division. I pledge to every citizen of our land that I will be president for all Americans.”.

He was somewhat more inviting of international trade and relations than previously indicated. He’s taking over the country in a lot better state than his predecessor and you could say the US is in a boom stage.

hile a Trump presidency is likely to add to global economic uncertainty, analysts believe the impact on the UK economy will – at least in the short term – be limited.

Any investment in a drawdown plan is for the medium to long term. Stock markets will continue to react to the unprecedented geopolitical events we seem to be seeing more of, but the management strategy of a portfolio should always be over a medium to long-term time-horizon. It’s important however, that portfolios are fluid, and tweaks are made to incorporate the changing landscape, after all, uncertainty can also bring opportunity, as well as risk.


4 Ways to invest in drawdown

Posted By: Phil Handley DipPFS AwPETR On October 5, 2016 Category: Pension drawdown


If you’re considering drawdown as an option for your pension, you’ll need to think about where and how you’re going to invest your money. 

The DIY Investor

Since pension drawdown became the more popular option for pension income withdrawal, there has been an upsurge in the Do It Yourself investor. As with most tasks, if you know what you’re doing, why not and save money on it rather than pay a professional.

If you know how to fix a car, fit a kitchen or build your dream holiday, why use a mechanic, Joiner or Travel agent?

The DIY investor, tends to be someone who’s had experience of investing before, either through investment ISA’s, share clubs or with having a general interest in investment and markets.

There are many companies who offer Self Investment Personal Pensions (SIPP’s), to cater for the DIY investor and who offer fund research tools, information and online trading.

Hargreaves Lansdown is probably the biggest player in this market and the access to information is huge. They are on the expensive side compared to other players in the market however.

Tilney BestInvest is another popular choice with dealing costs and platform charges slightly less than Hargreaves.

Fidelity has an excellent website with fund research and risk testing tools.

If you’re more comfortable with a larger, well know brand LV offer access to a pension drawdown plan at a reasonable price but with a limited amount of fund.

Using a Financial Adviser

For those who want to use pension drawdown for its flexibility, but aren’t confident picking their own investments, financial advisers can help.

The advantage of using a financial adviser is that they know the market. They deal with the pension providers and investment houses daily, and will therefore be able to recommend the most appropriate plan and portfolio of investments.

A good financial adviser will listen to you needs, explain how investment funds and drawdown works, measure your attitude to investment risk and then after some research, recommend a suitable drawdown plan.

Measuring attitude to investment risk is a vital part of this process. It’s important to have a group of investments that won’t surprise you. Investing has risk, but it’s important to understand how much risk you can afford to take and what the worst case scenario may look like.

Some investment funds target a certain level of risk. Think of a scale of 1 to 10, 10 being high risk and 1 being low. A fund manager may set out his fund to be a risk level 5. This means there is a certain mix of shares, bonds & gilts, property and cash within it. In this instance, the manager will always ensure the fund stays at a risk level 5, as he’s attracted investors who want a medium level of risk.

He won’t suddenly dump all his shares and hold the fund in cash or conversely only hold shares, as that would be a risk level 10.

It is therefore important to hold a portfolio of funds which overall, match your risk level.

The financial adviser should ensure your portfolio is also well diversified, meaning the risk is spread over asset classes, sectors and geographically.

There is a charge to use a financial adviser over DIY investing, but the charge could be worth paying over making the wrong provider and investment choices.

Non-advised Drawdown

A few providers, since the pension freedoms came into effect, have started a non-advised pension drawdown service.

This is to enable those who don’t want professional financial advice, to use drawdown.

The service on offer usually provides information on various options and pre-built portfolios, with the client ultimately picking a portfolio they feel best suits them.

This is an uncomplicated way to use drawdown, however fund choice is often severely limited. Portfolios are generally built with the cautious investor in mind which will restrict potential growth in rising markets.

There is usually still a charge from the provider to set a non-advised plan up, but unlike taking advice through a financial adviser, there is no recourse or compensation if the wrong investments are picked.

Using a Discretionary Fund Manager

This is an option which has traditionally been used by those with larger pension funds.

A discretionary fund manager will build a bespoke portfolio of investment based on the client’s risk tolerance and strategic objectives.

The manager has the right to change the client’s investment portfolio without prior consent, allowing them to react quicker to market conditions. They monitor portfolios closely and seek out opportunities which after acting on, will report back to the client.

Unlike DIY investing or a Financial Adviser built portfolio, you can get to meet the fund manager who has control over your money. A Discretionary fund manager has a limited number of clients and therefore aims to have a personal relationship with each.

The minimum fund values for this type of management are upwards of £250,000 and the ongoing charges will usually be more expensive that using a financial adviser. The service is more personal however, and if that gives more confidence and ultimately performance, it’s an option worth considering.


Pension Drawdown involves investing and investment risk. It’s not a product for an inexperienced investor or one who is nervous of stock markets. Pension funds are usually people largest and longest committed savings plan, it’s highly important therefore, that these are correctly managed through retirement.

We recommend speaking to Pensionwise if you’re unsure of your options at the outset.


What can I do if my provider doesn’t offer drawdown?

Posted By: Phil Handley DipPFS AwPETR On June 20, 2016 Category: Pension drawdown

Many existing pension providers are still not offering drawdown to their existing clients.

The majority of our enquiries are from people who have been left in limbo when trying to turn their pension into an income.

One of the main providers for this is Phoenix Life, a traditional consolidator of pensions. Over the years they have transferred a number of different life companies under the Phoenix Life brand. These include:

  • National Provident Life
  • Guardian Assurance Limited
  • London Assurance Limited
  • Pearl Assurance Limited
  • London Life Linked Assurance Limited

Since the pension reforms and the increased appetite for pension drawdown, people with these policies are now finding it difficult to find a drawdown provider.

What are my options?

As with any pension fund, you have the right to shop around with your savings. This involves deciding which of the pension options is right for you and then speaking to the providers to obtain quotes.

If you want to assess the flexibility of drawdown there are a vast array of providers and thousands of funds available. It can therefore be quite overwhelming where to start.

If you’re not experienced with investments but want to access drawdown, we’d recommend seeking advice from an independent financial adviser.

They can listen to your needs, wants and objective and recommend the most suitable plan and group of investments.

It’s important to understand the drawdown plan you are using for your pension as the wrong choice could cost you thousands in fee’s and may not last as expected if you chose the wrong investments.

Planning is the Key?

Unlike an annuity which is an income for life, a drawdown plan is a pot of money which could ultimately run out if you don’t plan your income.

At the stage of choosing a drawdown provider you should choose a plan which has the features you need and not end up paying for features you’re not going to use. Many of the larger providers offer plans to suit the mass market meaning there will be some people who end up in these which could do better elsewhere. Everyone’s situation is different and choosing a plan to suit your situation could save you in additional fee’s which the larger providers levy.

You should also conduct a risk profile exercise to determine the types of investments your portfolio should hold. By rule of thumb this should be a well-diversified portfolio including cash, bond, property and shares. It should be spread across both geographical regions and sectors. This approach limits downside risk whilst taking advantage of global opportunities.

If you end up with the wrong mixture of investment funds, your fund could be too volatile and run out sooner that you expected.

The next thought in the planning process is how much income you want or need to take out. The level of income will ultimately help determine the types of investments you should consider.

It is often worth putting together an income and expenditure forecast to see what your actual needs are. Financial advisers do this through the use of a cash flow forecast. This can project an investment growth rate together with taking inflation into consideration. It can dictate the income taken and help plan a more sustainable retirement.

Once a provider and investment portfolio is chosen, the transfer of funds can take around 6 weeks. The new drawdown provider will take care of the administration after you’ve given instructions though an application form.

For those who are faced with moving their pension fund because their existing provider doesn’t offer drawdown, the above are important considerations before a move. For those whose provider offers drawdown, it is also worth shopping around to get a better deal.



Concerns over DIY Drawdown investing

Posted By: Phil Handley DipPFS AwPETR On February 15, 2016 Category: non-advised drawdown Pension drawdown

There has been a surge in DIY investing into income drawdown since the pension reforms came into effect. Data from the Financial Conduct Authorities states that almost half of the retirees going into drawdown, have done so without the use of a financial adviser.

The rise of the Do It Yourself investor, has gathered pace with many experienced as well as first-time investors attempting to manage their pensions.

Some of the major pension providers have been quick to take advantage of this trend by offering their own brand of a ‘non-advised’ or DIY service.

The data, taken from the period of July to September 2015 shows that 178,990 accessed their pensions. Of this number, 68% were fully cashed out, of which 88% were small pots (less than £30,000).

Those who were looking to withdraw all their cash were the most likely to visit Pension Wise. This is probably due to a desire; to understand the tax implications a lump sum withdrawal can have.

The 178,990 figure includes those who cashed out, or chose to go into income drawdown.

One of the startling points from the data is that 58% of people stayed with their existing provider. There can be a massive difference between ongoing cost from provider to provider and it therefore seems that many people are not getting good value.

People used to shop around when purchasing an annuity, however for some reason they are not doing so with drawdown.

The DIY investor should understand that there are over 100 providers offering drawdown and thousands of funds available. Being stuck in the wrong plan could cost thousands of pounds in lost growth or excessive fees.

Never just accept your existing pension provider’s drawdown proposition.


The FCA is concerned that too many people are choosing to enter drawdown without fully understanding the risks. They have launched a review into the conduct of some providers non-advised service.

The Data also shows that people are still wanting a guaranteed lifetime income through purchasing an annuity. Annuities have attracted some bad press over recent years but they are still a great product for those who prefer the certainty of a guaranteed income. In total, 30% of the 178,990 people in the data sample, decided to lock into a fixed lifetime income.

Recent data from Retirement Advantage stated that more than 43,000 drawdown plans were sold in the first six months since April 2015. With recent market volatility, there is concern that those who were inexperienced with such investment products, didn’t understand the potential downsides to investing.

All funds have an expected risk level, sometimes labelled from 1 to 10, with 10 being high risk. Those funds that have done extremely well for years, will often be the ones carrying a lot of risk and equity exposure. When markets turn, these are heavily hit.

In April the FTSE 100 stood at 6,961, today it stands at 5,810. That’s a decline of around 17%. A £100,000 fund would therefore be worth £83,000 if just invested in this indices.

It’s important to have a well-diversified portfolio, both for when times are good but equally when markets are declining.

Taking income out of a drawdown plan whilst markets are declining also compounds the problem. Often referred to as pound cost ravaging (the opposite of pound cost averaging, where investing regularly is said to be the most efficient way of investing), it means units are being sold at a much lower price, therefore meaning the fund has to work even harder to make up the growth.

The sensible option when markets are declining is to try and find another source of income to cover expenditure needs. This isn’t always feasible however and it’s something many DIY investors are not factoring in.

Steve Lowe, external affairs director of Just Retirement says the regulator needs to consider introducing protections for savers entering non-advised drawdown.

“Drawdown is becoming almost the default in the non-advised space, and these customers are getting no reviews”

We shall await the conclusions of the FCA consultation paper, which may hopefully provide a more robust process to ensure the risks of drawdown are fully understood by everyone before taking this route.








Drawdown options for volatile markets

Posted By: Phil Handley DipPFS AwPETR On January 24, 2016 Category: Pension drawdown

If you’ve opted for drawdown with your pension fund it’s an unnerving time at the moment. Globally, billions have been wiped off market values and if your invested, you’ve probably not wanted to check your fund values recently.

Many markets have reached ‘bear’ territory, which means an adjustment of 20% or more downwards since their peak.

Although many portfolios will be diversified, this type of systemic risk, means avoiding declines is virtually unavoidable.

There are some investment funds available which are gear up to deal with exactly this situation however.

Fund managers realise that those entering drawdown are nervous of times such as these, which is why there are options to invest but with some downside protection.

Investec run a Multi-Asset Protector II Fund. The Investec Multi-Asset Protector Fund aims to provide attractive, long-term returns, with the added benefit of downside protection. A multi-layered investment approach:

The Fund aims to grow your investment over the long term and provide protection (the minimum amount you can expect to get back from your investment) at 80% of the Fund’s highest ever share price.

The Fund invests around the world in a wide range of investments. These include shares of companies (up to 85%); bonds (contracts to repay borrowed money which typically pay interest at fixed times issued by governments or companies); property; commodities; cash (up to 100%); and other eligible asset classes.

The Fund aims to provide the 80% protection by gradually switching from the investment portfolio to a cash portfolio when markets fall.

The graph below shows how the protection might work over time.

investec drawdown fund


Capital Guarantees are offer by Aegon and The Prudential. These type of funds are invested in global stock markets but offer a guaranteed of original capital, less any income taken, at the end of specific terms.

The term could be set for 10 years, for example, which means that if markets are down at that point, original capital value will be returned.

10 year drawdown guarantee

This type of guarantee would ease worry in period of shorter term volatility, however do lock you in for the full term, if you want to exercise the guarantee.

There is also an extra cost for the guarantee, which will affect growth during the term.

 Axa Life Invest offer a range of funds which automatically de-risk in volatile markets.

Each Fund in the Global Strategy range has a specific tolerance for the level of movements in investment markets (called the volatility target level), which is designed to meet the needs of investors with different risk profiles.

If the target level for a Fund is exceeded, then AllianceBernstein quickly decrease the Fund’s exposure to more “risky assets“ (e.g. equity-based investments, government and corporate bonds) and increase their exposure to less volatile assets such as short-term government bonds.

Axa drawdown fund

To ensure you don’t miss out on potential growth opportunities, the Funds will return to the allocation of your chosen Fund when the volatility in the market falls back below the target level for that Fund.

These funds generally outperform conventional funds when volatility is high, and under perform them when volatility returns to normal.

 Structured Products

This type of investment usually has a fixed term and promise to pay a return based on the performance of an indices. For example, they might promise to pay 50% return if the FTSE 100 is higher than the starting point at the end of a 5 years. The downside means you may just get back your original investment and therefore will have lost real value through inflationary risk.

Structured drawdown

In this example with the FTSE starting at 5900 points, the red line would return your original investment and the green line would return your original investment, plus 50% growth.

There are many different ways structured products are constructed but for the most part, they aim to protect your original investment if markets are lower at the end of the term. (Some investments might not offer protection if, for example the FTSE has gone down more than 50%).

There are hundreds of funds out there which aim to manage volatility and the risk of significant movement. The same strategy runs through them all, diversification. If equity markets are moving significantly, there may be safe havens in bonds or commodities.

If the recent turmoil has left you unnerved about whether drawdown is the right option, you may want to consider alternative retirement income options. Capital is nearly always at risk with investment and if you can’t afford a drop in fund value, it might not be right for you. Speak to an independent financial adviser if your unsure.

Pension Drawdown in 2016

Posted By: Phil Handley DipPFS AwPETR On December 29, 2015 Category: Pension drawdown

As we enter a new era of retirement income planning, pension drawdown in 2016 is set become even more innovative. The speed of change from those wanting annuities to those who prefer the flexibility and access of income drawdown has been rapid.

Pension drawdown will become the most popular retirement income choice in the calendar year of 2016, and pension drawdown providers are gearing up to serve the market.

Since the reforms came into effect in April 2015, many providers have introduced, re-structured and re-priced their drawdown offerings. The increased competition has seen product charges reduced or removed and tied charging lowered. This is all good news for 2016, more competition means a healthier deal for the consumer.

There’s going to be close scrutiny on the pension providers however as there are signs people are being rolled into a drawdown plan with their existing provider, as was the case with annuities. People who take the easy route and don’t shop around could end up spending thousands more on fee’s than doing a little homework.

The difference on a few fractions of a percentage in fee’s means many thousands of pounds over the lifetime of a pension drawdown plan.

£200,000 @ 1.75% is £3,500 per year. £200,000 @ 1.25% is £2,500 per year. Over the course of your retirement that’s a lot of additional cost.

A popular question I was asked in 2015 was around guarantees. People who aren’t used to investing or don’t have the appetite to experience investment risk want some kind of guarantee. Providers realise this and are set to offer more products with guarantees to accommodate these people in 2016.

For those who have experience of investing or wish to manage their own pension funds, many providers are offering DIY options. This is where an investor has access to a suite of investment tools to help in decision-making process. Online access, funds research and portfolio construction can all be carried out in one place.

DIY investing is different however, from non-advised drawdown. There has been a movement by existing providers to offer access to a limited suite of drawdown funds through their call centres. Although providing access, they don’t run through the complete risks and conduct an in-depth risk profiling exercise, as a qualified financial adviser would. As a result, many people have ended up in drawdown without the full knowledge of what might happen if things go wrong because of unsuitability. The FCA are conducting a review of these practices early in 2016 but the results won’t be known until the middle of the year.

Whatever 2016 brings in terms of innovation the constants are how a portfolio should be constructed. A portfolio should be balanced well between cash, bonds, property and equity. It should match your attitude to investment risk and you should take into consideration your income requirements.

You should also ensure the expression of wish forms are accurately completed. Simply putting your spouse on the form to receive your fund when you die could lead to unintended tax consequences if they were to die before you or you wanted assets to also be available to your children.

Need help choosing a drawdown plan?

Speak to a Qualified Professional

If you’re unsure which provider to choose or want to know more about whether income drawdown is right for you, speak to one of our retirement experts.  We are completely independent and offer a no-obligation chat about your circumstances.

Not the best start for those entering drawdown

Posted By: Phil Handley DipPFS AwPETR On November 17, 2015 Category: Drawdown Fund Performance Drawdown tips Pension drawdown

The most overwhelming risk with income drawdown is running out of money before your time is up. Drawdown was only usually considered a viable option for those who could afford considerable fluctuations within their funds.  However, now it’s the default option for retirees.

One of the biggest fears is something called sequencing risk or ‘pound cost ravaging’. This is a result of early losses within the fund doing irreplaceable damage to the overall portfolio and strategy for sustainable income.

If a portfolio declines 10% and 5% income is taken during a year, it will need to grow by around 17.65% the following year to get back to the same position. It will need to grow by even more if income was taken in year two.

Take £100,000 declining 10%, which leaves £90,000 and then take 5% of the original value (£5,000). This leaves a fund of £85,000.

If the income needed was £5,000 a year (5% of the original value), any early losses means the fund would have to work a lot harder after these decline to be sustainable.

The perfect scenario is a fund which grows by 5% a year and the growth is just skimmed off the top, leaving the fund value constant.

So £100,000 grows 5% to £105,000, and 5% (£5,000) is taken. Meaning a capital value of £100,000 is left.

Unfortunately, markets don’t behave and right now, still within our first year of the mass take-up of drawdown, they’re being very naughty.

Markets are down 11.71% today, since the new tax year began on the 6th April.

What this means is that people who need to take an income at the above percentages, may have an issue with the longevity of their portfolio.

If the markets continued to decline for a second or third year at the same rate, it may force an earlier take up of equity release as an additional form of income.

Taking an income in declining markets locks in losses. It doesn’t give that part of the fund time to recover.  The result is a fund which diminishes a lot quick than forecast.

So what can you do to prevent this?

There are various schools of thought and strategies to limit this effect.

The 4% withdrawal rule is one commonly considered approach. Used largely in the US where people similarly keep their pension invested in retirement, it stated that you have an 80% to 90% chance that your savings will last 30 years. You simply withdraw 4% in the first year and then subsequently increase this by inflation to keep its real spending power.

This really depends on having a good diversifications of investments within your portfolio. Stocks, bonds, cash and property. Over exposure to less risky assets such as cash won’t provide it with enough ability to grow and over exposure to stocks might reduce its value significantly in highly volatile markets.

Another key consideration is life expectancy. How long will you need the money to last? This is the $64,000 question. A clever way is to use annuity companies to help you.

Annuities are based on medical history and the insurance companies are pretty accurate at assessing risk. They will determine, based on your health, medication and past ailments, how long they will have to pay you before they make a profit.

You could therefore request a number of annuity quotes to determine what break-even point is. How long will an annuity company pay you before they have paid out more than you put in. Obviously they will factor in the growth you receive on your money but it’s a useful, if not sobering tool to use.

Others suggest keeping some of your drawdown fund in cash. This can be used instead of selling investments within your fund when markets are declining. It could then be replenished in rising markets after some growth is achieved.

A sensible, if not always practical route, is to only take the income generated by the investment, this is known as the natural yield. This would leave the underlying investment intact giving it more chance to provide the realistic growth you expect.

There are many options to consider and they won’t be suitable for everyone.

What we do know is that right now, those who have entered drawdown haven’t got off to a good start. If investment risk is something that’s new to you or your nervous of the effects it could have on your fund, there are other more secure options.

If in doubt discuss these with a financial adviser.

5 common questions I get asked about drawdown

Posted By: Phil Handley DipPFS AwPETR On October 26, 2015 Category: Pension drawdown

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

  • Globally
  • 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.