Targeted Drawdown Strategy

02 Mar 2020

A more predictable, less volatile way to drawdown income in retirement

This article is intended for professional Advisers only
Is anyone old enough to remember A-Day and so-called pension simplification? Amazingly, it is now 15 years since the pension simplification reforms managed to achieve the polar opposite of what they promised on the tin.
It is also nearly the fifth anniversary of the introduction of Pensions Freedoms, the main effect of which has been to turn income drawdown into the new normal in retirement strategies.
It would be fair to say that, until now, some in our industry have not covered themselves in glory when addressing the double whammy of these major events. Where is the drawdown product that is simple and effective in addressing clients’ core needs? Certainly, several decumulation products have been introduced amid much fanfare before being quietly, and quickly, shelved. They didn’t work for either the clients or for their Advisers: a lose-lose rather than win-win scenario.

Designed with clients and Advisers in mind

This is precisely the major issue, and gap in the market, that we are addressing with our recently launched Targeted Drawdown Strategy (TDS) which has been created exclusively for use with client pension portfolios, such as SIPPs. We asked ourselves whether it was possible to design a simple and appealing drawdown strategy: one that combined predictability of income with the flexibility, access and control provided by drawdown. 
Our second key design stipulation was the need to solve the other major market challenge: could we create a strategy that would offer a compelling proposition for both client and adviser while supporting the FCA’s requirements for client-centric drawdown strategies with respect to Centralised Retirement Propositions? 
The answer in both cases was a resounding ‘yes’ – with TDS it is, indeed, possible to enjoy the best of both worlds.
The key to TDS is that it is effective, easy-to-use and confers clear benefits. The core premise is that it addresses those clients with a need for a strategy that delivers a targeted, predictable income in the early years of retirement. The use of the word ‘targeted’ in this sense is deliberate as it accurately describes the unique benefit of the strategy. 
Unlike standard drawdown, which leaves your clients vulnerable to a combination of volatility drag and sequencing risk in the event of a market crash , TDS offers them a welcome degree of income certainty while retaining access to, and control of, their pension funds. 

The graceful use of innovative bonds

It achieves this through a unique and innovative approach to portfolio structuring based on our use of Impala Bonds. Impala bonds are investment grade, zero-coupon bonds which would normally be beyond the budgets of most private investors. 
The predetermined Gross Redemption figure ensures the maturity value of the bonds is known from the outset, hence they are not subject to market volatility and offer a predictable return if held until maturity. Impala Bonds also offer an attractive Gross Redemption Yield than simply holding cash with interest.
The bonds are provided by Investec Specialist Bank, ensuring high liquidity, and are researched and selected by the Investec Wealth & Investment (IW&I) Fixed Interest team. While structured products do a similar job, they may in some cases be too complex for retail customers to understand. These products could also add extra risk to a client’s portfolio, potentially pushing the overall risk profile beyond that which the client originally agreed. The TDS strategy, which is suitable for all risk levels, effectively resolves these issues.

The compelling win-win for Advisers and clients

However, by allocating a significant portion of your client’s Fixed Interest assets to Impala bonds you give them reassurance of predictable income in retirement, reduced exposure to market risk and enable them to invest the remainder of their portfolio in growth assets. In a typical medium risk portfolio with a Fixed Interest component of 20%, the bulk of that asset class – around 19% – would be allocated to Impala Bonds.
By solving a very real problem for clients, typically those with pension pots of over £250,000, TDS offers an attractive new string to your bow. It simultaneously helps to reduce the amount of time you would otherwise need to spend on administration and regulatory compliance.
What’s more, the simplicity of the proposition means that your clients will easily grasp the benefits of the strategy and what it can achieve for them. Existing clients already in drawdown can be easily migrated to TDS. Its controlled nature is likely to provide reassurance for those who have transferred out of the long-term certainty and security of a DB scheme in order to enjoy the flexibility, control and tax-efficiency provided by a SIPP.

Oven-ready and compliance-friendly

So far, so good, but there’s much more to this robust TDS proposition: it also ticks the big compliance box of enabling you to offer a Centralised Retirement Proposition (CRP) for your clients, proving that you have taken reasonable steps to ensure that your clients won’t run out of money in retirement. 
Since Pension Freedoms were introduced, there has been a much greater requirement for a distinct CRP to provide for the decumulation phase. Not all Advisers have formal CRPs in place. Indeed, many carry over their Centralised Investment Propositions (CIPs) into the retirement phase. This suggests that they are not explicitly taking account of the shift in risk requirement for post-retirement investing when loss avoidance and wealth preservation become the priorities. TDS actively addresses this issue.

Giving Advisers freedom and control

Beyond the elegance of the drawdown strategy, TDS also performs well as a customer relationship tool. It allows you to get closer to your clients while reducing the administration and streamlining the process for doing so. As the Adviser, you will remain in control of the relationship with your clients while IW&I takes responsibility for providing the discretionary management of your client’s portfolio. With TDS as the core pillar of your CRP, you’ll enjoy closer engagement with your clients, as the strategy stimulates the need for meaningful conversations when re-running cash flow modelling on an annual basis. 
Their personal goals and needs will be constantly evolving in line with the ongoing changes to their lifestyle, mobility, reliance on others, and desire to pass on wealth to future generations.
With the Targeted Drawdown Strategy taking care of the issues of predictability and flexibility in managing future wealth, you’ll be well-placed to concentrate on building the enduring relationships of trust and expertise that your clients evidently value.

Discover how your clients could benefit from our Targeted Drawdown Strategy