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Research flags no silver bullet drawdown strategy

28 November 2017

Retirement Advantage has warned that DIY drawdown investors could be exposing themselves to a host of risks.

A new report commissioned by the retirement specialist has suggested that there is no magic “one size fits all” investment strategy that works for the duration of retirement, and DIY investors could be left exposed to longevity, investment and capacity for loss risk.

Retirement Advantage commissioned EValue to stochastically model five strategies to see how different drawdown approaches perform; unit cancellation, unit cancellation with cash buffer, living off the natural yield or income, longevity tail risk and annuity.

The core analysis was based on a 65 year-old with a pension pot of £200,000 (after tax-free cash has been taken), investing in a mixed portfolio of 60% equities and 40% bonds, targeting £10,000 a year.

Andrew Tully, pensions technical director at Retirement Advantage, commented: “We’ve seen a significant shift to drawdown as people move away from the security of annuities. We’ve also seen a significant number of people shun advice and go down the DIY route. With this comes the responsibility for people to manage the investment, longevity and capacity for loss risk, any of which can seriously put plans off track.

‘Drawdown is a complicated business and our modelling work proves there is no magic solution or silver bullet. No one strategy combines the best of all worlds to create the ideal outcome and it may well be that a combination of approaches through retirement will work best.”

Tully said that given the complexities involved in most people’s needs means that it is difficult to choose the right strategy to make the most of pension funds, and by failing to seek the professional advice, investors could run into trouble.

 

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