Pension freedoms have seen billions of pounds of pension savings remain invested in financial markets. However, the stock market peaked shortly after the new rules were introduced; since then more than one-fifth was wiped off the value of British blue chips.
The FTSE 100 hit a peak of 7,097 in mid-April of last year – almost 22% higher than a low of 5,537 reached in February of this year.
Such a dip in the market poses real problems for clients and shows that sequencing risk (the order of returns) can play havoc with a pension pot, especially when an income is also being taken.
How are advisers handling this challenge? We spoke to three to find out.
The rocky road for financial markets has led Tamsin Caine, a Chartered Financial Planner at Greater Manchester-based Smart Financial Planning to recommend that clients have an emergency fund covering one year of income.
“In the light of the falling stock market, we’ve advised clients to move a year’s worth of drawdown income into cash and reviewed their financial plans,” she said.
“We have not, however, recommended a change in investment strategy or a complete move to cash as this is more likely to destroy value as stock markets begin to recover.”
A handful of existing clients have used the new pension freedoms; others have approached Tamsin looking to withdraw their pension funds.
“These people often haven’t fully understood the implications of withdrawing the full fund in terms of the taxation on the fund now and the potential impact on inheritance tax on their death, unless they spend the whole amount,” she adds.
Nigel Notley, Managing Partner of Hertfordshire’s Westbury Asset Management, has been giving advice on income drawdown since it was first made possible in 1995, so has seen plenty of bear markets.
For him, the key is not to automatically rebalance portfolios to avoid crystallising losses.
“Instead, we look to run portfolios in their existing state until a recovery has occurred in equity markets and then adjust the asset allocation to a composition which once again can allow access to funds to cover future income without incurring paper losses,” he says.
“If we get a prolonged bear market, such as 2000-2003, aggressive spending cannot be sustained. It’s time to take fewer cruises and dust off the tent.”
While model portfolios can work well for clients accumulating pension assets, Nigel says that a bespoke investment approach is better suited to those drawing their pension wealth: “Decumulation necessitates a more hands-on approach to portfolio construction.”
Tim Walsham, Director of BRB Wealth Management of Staffordshire, has found the pension freedoms “extremely useful” to generate enough taxable income to utilise a client’s personal allowance or strip out sufficient income to take them up to the higher rate tax band.
“The new flexibility has made the job of matching the way that our clients manage their money to the lives that they want to live somewhat easier,” he says.
Short-term fluctuations in investment values do not concern Tim greatly, but he stresses the importance of good client communication.
“We ensure that none of our clients are taking any more risk than they can tolerate and that they have sufficient monies in cash deposits – typically three years’ income shortfalls – for their short-term needs,” he adds.
“As ever, the key is good client communication and making sure that all investments are appropriate in the context of the client’s overall financial plan.”