Once again global events are intervening in the financial markets, with continued conflict in the Middle East impacting economies all around the globe. It may seem as if recent years have given us a disproportionate amount of global shocks, but across the decades there have always been events which have resulted in market volatility.
For those investing for the long-term, such short-term instability is not so much an issue, but if you are needing to draw down your pension investments to fund your retirement, you are much more vulnerable to short-term market unpredictability.
Even though the ‘Pensions Freedom’ legislation of 2015 provided for more flexibility in the way that people could access their pension funds – and specifically removed the compulsion to purchase an annuity before the age of 75 – pension drawdown does leave those coming up to retirement especially exposed to such volatility.
Almost everyone is looking for three things when planning how to take their retirement income: a reliable income, growth potential, and the flexibility to adapt as their lives change.
Our new Retirement Income Solution adopts a three-strategy approach to managing a pension fund. The key benefit of this is flexibility – as a person’s needs change, they can adjust their investments without needing to constantly move money around.
Essentially the approach adopts three strategies:
The Short-term Cash Pot
This is a pot which holds enough cash to cover income need for typically the first two years of retirement, and which can be ‘topped up’ from the other two pots annually to maintain that two year cycle. This pot would include any guaranteed retirement income, such as a defined benefit occupational pension or the state pension.
The ‘Lifestyle’ Pot
This is designed as a medium-term holding which seeks to provide inflation-beating returns. Although invested in the market, this pot adopts a more cautious approach, with the aim of avoiding any short-term market volatility. This is the pot which will be used to ‘top up’ the short-term cash pot on an annual basis.
The Long-term Growth Pot
Designed to continue to grow capital within the pension fund, this pot remains invested in a more traditional way, reflecting the risk profile of the individual.
This investment is growth-focussed, not just protecting against inflation, but supporting future income and/or capital withdrawals. It aims to grow capital steadily over the long-term through investing in a broad range of global assets, including shares, bonds and property.
Funds from this pot can be moved to ‘top up’ either of the other two pots as needed, in a way which is timed to avoid any short-term market volatility.
Pensions Freedom was all about providing flexibility in how retired people accessed their pension savings; increased market volatility has created a new issue for those seeking to take advantage of that flexibility while protecting themselves against short-term economic shocks. This new approach aims to maintain that flexibility while providing a new, multi-faceted way of doing just that.