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The Insider guide to drawdown
In association with BlackRock

Interview with Stewart Bicknall, Prosperity Wealth

Which questions do you use with clients when starting the conversation about retirement?

I always ask, ‘what’s the reason you’re retiring?’ That usually helps frame the conversation, if they can or can’t afford to retire. If they’re retiring because of ill health then I know we’re not going to discuss delaying retirement, so I think that is really key.

I ask their income and expenditure expectations, about any overhanging debts.

I ask what their family situation is like, if they’re married, what’s the income requirement coming from the spouse? How many children have they got? Any grandchildren? What’s their expectation from you in retirement? Sometimes it might be, ‘well I’m retiring now because I’m going to be the babysitter’. That’s fantastic, you don’t need lots of income. Or, are you retiring now to help your children out because they can’t work due to illness? In which case, you’re going to help them out in terms of finances as well.

My final question is about what they expect from me. A lot might say, ‘I just want you to give me a massive return’, so it’s managing those expectations.

Are there any typical questions you get asked by clients, or indeed any unusual or tricky ones?

Often, they might ask me if they can afford to go travelling, or have five years of craziness. That gives me an insight as to what their first five years of income requirements might be or what they plan to do with any of their PCLS (pension commencement lump sum).

It’s often about managing their expectations and explaining in respect of the rules, so they might ask if they can take out £40,000 this year. But they only have £100,000 in their pension. They might say ‘But I thought it was called freedom?’

We then have to explain that the GAD (Government Actuary’s Department) rate for capped drawdown has gone and that their money needs to last, so it’s really to try and build the idea of everybody’s financial discipline.

What is a realistic and safe withdrawal figure?

We try to stick to the normal sustainable drawdown rate, which is not technically correct in the UK. Everyone uses 4% or 5% a year, but in the UK it’s actually 2.9%. The 4%-5% rule is actually the American rate but it seems to have stuck in the UK for the last 10 or 12 years. So as long as we don’t exceed that (4% or 5%), we’re happy.

We know that with growth rates and bull markets, the average growth rate is still slightly higher than that, so in reality if they were just going to take their income from retirement then that should be a sustainable drawdown rate, giving them funds that last to age 89 or 90 or so.

We’re also very conscious that if someone’s retiring at 59 in amazing health, they’ve got a 54-year-old wife with no pension funds, effectively that’s going to have to serve both of them.

While a 4% rate will last to age 100, if they think they might want a new kitchen, or a new car, or a couple of new cars, we plug those in, we actually know that the sustainable drawdown rate is going to kick down a little bit lower.

It’s about having that conversation with the client, talking about risk, referencing their risk questionnaire. For instance, if they came out as a two out of five, but seemed a bit nervous about investing generally, we wouldn’t want to take on more risk, therefore you have to be careful and explain there’s only so much growth you can achieve by taking on the amount of risk you’re taking.

How do you tackle the conversation about life expectancy?

We work to average life expectancy for the individual if they are in good health, so in essence it’s around 89-92 depending on who they are, where they live, gender and things like that.

We talk about their health, because even if they’re in bad health, you would never want to have the conversation to say, ‘well, you’re going to die at 73, Mr Client’.

Typically, we try and let the funds last until age 100 because life expectancy is generally increasing. If you’re looking at someone who’s early 60s and they’re in good health, they might have been leading a really good lifestyle for the last 10 years, they continue doing that for another 30 years, there’s a very good chance they could last until age 100. You know, healthy eating, less drinking, no smoking anymore, better life in retirement, etc.

How do you assess attitude to risk and capacity for loss for clients in decumulation?

We use EValue as our risk profiling tool, on a scale of one to five, and every client is assessed every year. We show a one-pager risk confirmation, which shows a risk one is, what a risk two is and the upsides and downsides of the potential path of that portfolio.

If people are entering drawdown, taking retirement funds or any type of retirement benefits, we carry that out again, but it’s not a different questionnaire. If someone is putting £20,000 into an ISA, I’m completing the same questionnaire as a 65-year-old who’s going into drawdown.

We have a capacity for loss questionnaire, but that’s more interpretation from the adviser. We do the set 13 questions but it’s down to them and the adviser to determine what we think is the most appropriate risk profile for them in retirement.

That includes questions like, ‘are you going to take income in the next five years?’, which naturally pushes it down. There are questions that will dampen the volatility for people going into retirement or people taking an income, but that’ll be no different to somebody who’s taking an income from an ISA, theoretically.

It’s the capacity for loss which could impact the strategy they’re going into, so we have a checklist that advisers use if the client is taking pension benefits, which standardises the process for compliance to check.

We have to give an annuity quote; we have to discount an annuity and we have to discount a fixed-term annuity. If clients have that low capacity for loss, and a relatively low risk profile questionnaire result, we have to consider things like a guaranteed income as well, or a blend of both.

We use EValue as our risk profiling tool, on a scale of one to five, and every client is assessed every year. We show a one-pager risk confirmation, which shows a risk one is, what a risk two is and the upsides and downsides of the potential path of that portfolio.”

How do you describe and discuss the issue of income sustainability with clients considering drawdown?

Existing clients are often more open, saying ‘I just want to make sure you’re telling me I can have the income I can have; show me evidence I’m doing something sensible or drawing out enough income that’s suitable for me.’

I just use open questions you can ask to any client, whether they’re new, old or young, or if they’re 55 or 75. It’s about their general expectations from retirement because when we drill down to numbers, the income they can get will come from the pot of money they’ve built up.

We’ve got centralised growth assumptions for all risk profiles so, when we’re doing cashflow forecasting for example, our advisers use the most appropriate growth rate to avoid people putting 12% in there. I’m not saying they would but years ago when cashflow first came out it was a really great selling tool for advisers, which is not how it should be used, it should be used as a planning tool.

Those centralised growth rates will include inflation and total pension drawdown charges, so when we look at a sustainable drawdown rate, we look at the client’s income requirements – fixed household costs, a portion of discretionary income, plus any known expenditure, be that £40,000 to pay off the mortgage, £20,000 for a new kitchen, or a new car when they turn 73 … it’s all plugged in.

Which investment strategy or strategies do you typically recommend for clients in drawdown?

We were traditionally a multi-asset firm so, up until I took over the proposition four or five years ago, and chaired the committee, it was all multi-asset, pretty much.

Now, we run a panel of all risk-rated, multi-asset ranges that will cover one to five so it doesn’t impact risk decisions. For instance, if the client is a two, they’ve got every option for them as a two. The adviser shouldn’t have to move up to a three to get the fund they want.

Multi-asset probably covers about 85% of our strategy at the moment – hundreds of millions across various different multi-asset strategies, from passive to active to direct equity, to fund-of-funds, to discretionary-managed, to ESG, to even more sustainable strategies. People can go off that panel if they see fit but they have got to get approval and do all the right due diligence, which rarely happens but when it does it is relatively straightforward.

Without letting out all the secrets, our proposition is that all those multi-asset funds are there for any adviser to use 100% for any client – a 65-year-old in drawdown or a 25-year-old with a £25,000 ISA – without creating any additional risk. From a risk point of view, that’s how we manage it internally.

We’ve also got our own discretionary managed models as well. We developed them a couple of years ago, and they’re really tailored to people in drawdown. What we’re trying to do when thinking about our CRP (centralised retirement proposition), is whether I could come up with something that was a little bit more cautious, a little bit more hands-on for people in drawdown, just to protect them a little bit from the wild markets that we’ve experienced over the last four or five years. We’ve got our own version discretionary-managed MPS (managed portfolio service), which is only available to Prosperity clients, that has rules in place to dampen volatility at all moments in time, so that is really tailored towards those people who are in drawdown or clients who are just really cautious in general.

To what extent do you talk about ESG with drawdown clients?

It does form part of our investment strategy – we have those options there for advisers if those clients see fit. We have three questions that tag onto our risk profile questionnaire that talk about sustainable investing – effectively there’s a question around one’s E, one’s S, and one’s G preferences to see how important they are, to start conversations about whether they want to invest in a green fashion.

It’s not huge at the moment, but it’s definitely increasing so there’s definitely a trend for it.
I personally see it as something the younger generation are very much involved in , albeit there will be those in their 60s now that are more involved in it, purely because they’ve seen the worst and now understand the world might be more painful from an environmental point of view for their grandchildren, for instance.

They’ve built up good funds in pensions and houses and now want to use those funds to make a difference. I’ve got some clients in their 60s and admit they’ve never cared about it before, but in the last couple of years it has become huge.

They’ll say, ‘I’ve got three grandchildren all under five and I expect their future to be bleak in terms of the climate, the cars they drive, the sustainability of everything, the environment, their meat consumption, the food they should eat…’

These people know they’ve had it easy; now they’re the ones with all the money and want to use it to invest in meat-free production companies, battery tech or sustainable living as a whole.

How often do you review clients in decumulation?

Like many firms, our company rule stipulates that every client must be reviewed at least once a year.

But in reality, we have many more touchpoints with drawdown clients than that. In the first few years of drawdown, we encourage more, then after that we will return to annual reviews.

It may be to help nurture them through their initial drop in income, for example. If they’ve gone from £80,000 a year, now both are retired, their incomes are obviously going to be smaller. It’s making sure they understand that this is the income they’ve got to live on for a good period of time to try and help them get into the fashion of retirement in the right way.

It’s not necessarily about making sure they’re not spending too much, but also making sure they’re doing the things they want to do as well. Then a little bit later when they get more comfortable with drawdown, they kind of get into the swing of things.

It’s a bit like if you’ve had a big job and are made redundant, you still live that life for a period of time, but then you get a new job on half the money, and you get used to it. You’ll buy a different car, go out less or do different things. It’s all about helping them manage that transition, get used to what’s happening and understand what’s going on.

How do you stress-test the plan?

Our advisers must use the annual growth rate assumptions in their cashflow forecasting, they must include inflation and must include product charges.

The funds must aim to make life expectancy before they go into retirement, otherwise it could potentially cause them problems.

We do a selection of cashflow forecasts including a small element of catastrophe planning, so instead of just using the 5.1% growth rate per year with inflation and charges coming off, so your net’s going to be 2%. We will factor in a Covid scenario, or another 2008/09, just to show the impact of a market crash.

The adviser must do it at outset, so if you retire today and it all goes belly-up in November, losing 20% in the first year will have a huge impact on retirement.

It’s all to show that the advice we’re giving people errs on the side of caution and if the income they’re taking from their fund is sufficient, then both parties are really pleased. For 80% of drawdown clients, that works. They’re retiring with funds and an income that is cautious enough that even if various scenarios happen, their funds will last to life expectancy.

the advice we’re giving people errs on the side of caution and if the income they’re taking from their fund is sufficient, then both parties are really pleased. For 80% of drawdown clients, that works.”

Further reading

Interview with Duncan Chance

Interview with Wayne Tandy

Interview with Peter Savage

Interview with Helena Wardle