Tony Hicks, Head of Sales, Copia Capital

Last year, the FCA kicked off its thematic review of retirement income advice, by asking 1,300 randomly selected advice firms to provide details of their charging models and how much they make from advice fees. The regulator focused on several themes within the survey of 87 questions, one of the main ones being to establish if firms are charging differently for clients in decumulation compared to those in accumulation.

Retirees today face different challenges and risks to those who’re still building their wealth, and this is something the regulator is looking at very closely. While in the accumulation phase the main objective is to provide a real return on investment whilst also beating inflation, all within the client’s appetite for risk. However, in decumulation it’s vital to consider longevity and sequencing risk, as well as balancing the client’s requirement for a more certainty of outcome.

In recent years, we’ve seen lots of market volatility which has resulted in many clients in the decumulation phase having to sell assets in unfavourable market conditions to allow them to continue to receive an income. Fourteen months of consecutive interest rate rises as central banks attempt to quell inflation has had a knock-on effect on bond capital values, adding further uncertainty to investment outcomes. This, along with the continued cost-of-living crisis eroding the spending power of retirement savings and increasing the possibility of people running out of money sooner than required, has meant people in retirement face more challenges today than ever before when it comes to ensuring their portfolio will sustain them in retirement.

Despite the different risks involved, many advice firms continue to use the same portfolio ranges for their accumulation and decumulation clients. However, I believe that the traditional approach of the 60/40 bond/equity portfolio has fundamentally failed those investors in decumulation due to the correlation of bonds and equities in falling markets. Recent examples of clients entering retirement and seeing a fifth of their portfolio decimated in the very first year due to being in the wrong portfolio are concerning and forces the client to alter their whole plan for retirement.

The Consumer Duty is clear that advice firms must “avoid causing foreseeable harm”. This includes acting to mitigate the known risks facing retirees – sequencing, longevity, inflation and interest rate risk. I believe that the FCA’s thematic review of retirement income advice should recognise these different risks and ensure they are taken into account during the planning process. A lot of advisers we speak to feel the same. In a recent Copia poll, half (52%) of the adviser respondents agreed that the Financial Conduct Authority’s thematic review of retirement income advice should recommend that a different investment approach is required for clients in decumulation compared to those in accumulation.

There are different ways that decumulation risks can be factored into the investment process. One is by using alternative sources of risk and return that provide downside protection and generate absolute returns during periods of stress. These alternative assets often include hedge funds, infrastructure, real estate and commodities. Although these products can be higher risk than more traditional assets, the lack of equity / bond correlation can prove particularly useful in decumulation portfolios.

Another way to manage decumulation risks is to use guaranteed income as an asset in conjunction with a purpose-built managed portfolio. Guaranteed income producing assets offer the same certainty of income as traditional annuities but offer the flexibility of an integrated asset on platform. The benefit of these assets is that they pay a guaranteed income for the life of the client, personalised to the client based on their age, health, lifestyle and where they live, mitigating longevity risk. As the income doesn’t fluctuate and is uncorrelated to anything in the portfolio, it reduces the need to sell assets in unfavourable markets to generate income, providing some protection against the effects of sequencing risk, or ‘pound cost ravaging’.

This also allows the investment portion of the portfolio to be weighted slightly more towards equity and alternatives, and slightly less towards bonds, offering more opportunity for growth, potentially enhancing outcomes for a legacy pot, without increasing overall risk. The regular income from the guaranteed income asset can be used to subsidise withdrawals, and any surplus can be left in the cash account to help manage tax liabilities, retained for future use, or reallocated back into the portfolio to enhance the client’s legacy pot.

To manage the specific risks investors face in decumulation and offer advisers and their clients greater choice over how they achieve their retirement goals, we recently launched two purpose-built ranges for investors in decumulation. Copia Select Retirement Income Plus (RI+) uses a guaranteed income solution, which is delivered by Just Group’s Secure Lifetime Income (SLI), with a complimentary investment proposition managed by our expert investment team. Copia Select: Retirement Income allocates a greater proportion of assets to less traditional assets which provide a diversified alternative exposure, such as hedge funds, infrastructure, real estate and commodities. To find out more about how these new portfolios can support your client’s investment needs, have a look at our website, or speak to a member of our sales team.


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