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Centralised Retirement Propositions need to become mainstream

24 January 2019

Centralised Retirement Propositions (CRPs) need to be prioritised and brought into the mainstream, Seven Investment Management has said.

The group said a combination of pension freedoms, low annuity rates and shifting demographics have created “a growing need for solutions in retirement” for many clients. Despite this, 7IM’s head of intermediary Verona Kenny says CRPs have yet to become as widely used as centralised investment propositions (CIPs) are in the accumulation stage of clients’ portfolios.

She explained: “The world has moved on and the end game for many advisers and their clients have been pushed out substantially. For advisers, this is both a massive opportunity but also a significant risk. Once clients move into decumulation their pots start to erode as income is withdrawn and there is an increasing risk of running out of money.”

To demonstrate how a very small increase in investment risk can make a remarkable difference to outcomes when pension pots are at their greatest, in retirement, and the effects of compounding are at their most potent, the investment manager carried out research modelling returns for two investors. In the model each had saved an average of around £7,500 a year between the ages of 30 and 60, retiring with an annual pension of £22,000 a year. One saver targeted a cautious return of 4% a year, while the other invested in a balanced portfolio targeting a return of 5% a year.

The research showed that at retirement the first had a portfolio worth around £375,000 and the second had £425,000. The first ran out of money at 86, having withdrawn £22,000 per year. The balanced investor still had around £275,000 left at this point.

“Advisers are best positioned to help clients tackle and manage their retirement in the same way they have helped them save and prepare for it,” Kenny said. “Arguably, it is an even more crucial service to offer clients. This is because once in retirement, the danger is that pots can be eroded very swiftly as income is withdrawn, with the fear of actually running out of money in retirement at the forefront of clients’ minds.”

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