UK investment firm AJ Bell has unveiled a drawdown solution to help IFAs manage clients taking income in retirement.
The AJ Bell Retirement Portfolio Service will be relevant for any clients requiring a sustainable income in later life and will be available via a self-invested personal pension (Sipp), individual savings account (Isa) or general investment account (GIA).
It will be “particularly attractive” to those drawing an income under the pension freedoms, the firm said.
The service offers advisers a fully-managed centralised retirement proposition and is available, free of charge, via the AJ Bell Investcentre platform.
Kevin Doran, chief investment officer at AJ Bell, said: “Given the popularity of the pension freedoms there is a real need for products and services that help advisers deliver an effective retirement proposition.
“With income drawdown now the most popular retirement income option, advisers and their clients are having to get to grips with managing portfolios in the withdrawal phase and the specific challenge of sequencing risk.”
Process
Designed in conjunction with IFAs across the UK, the service combines four strategies aimed at “prolonging the longevity of portfolios in decumulation, while minimising sequencing risk”, the platform added.
Sequencing risk can have an “extremely detrimental impact on a portfolio if investments are sold at a loss”.
If investments are sold after a fall in value, the remaining funds need to work harder to make up the loss.
This can be particularly damaging if those losses occur in the early years of retirement and can impair the longevity of the pension pot.
The 4% rule
To promote portfolio longevity, the service is designed to allow advisers to promote the 4% rule.
This works on the premise that if someone withdraws 4% of their retirement fund value in the first year and then adjusts subsequent withdrawals for inflation, they should avoid running out of money for 30 years.
However, AJ Bell said the service is “flexible enough to allow clients to take more or less than this amount should they choose to do so”.
The service splits the client’s investment into three buckets:
- 45% in the AJ Bell Income and Growth fund;
- 45% in the AJ Bell Income fund; and
- 10% in cash.
Both funds are diversified multi-asset funds investing in passive ETFs and active funds, while the cash bucket is used to meet the client’s income requirements as agreed with their financial adviser.
The yield produced by the two funds is paid into the cash account, replenishing it over time and reducing the need to sell down investments at the wrong time.
This acts as a “natural defence against sequencing risk”.
Smart rebalancing
AJ Bell said that further protection against sequencing risk comes via AJ Bell’s smart rebalancing approach, which banks profits along the way.
The underlying investments will experience periods of strong gains and periods in which investment values fall.
Smart rebalancing reduces the need to sell after a market fall by selling investments only after gains have been banked.
Doran added: “Our new retirement portfolio service has been designed as a ready-made solution that enables advisers and their clients to focus on their income needs, without having to worry about the running of the underlying portfolio.
“The cash bucket will ensure they don’t have to sell investments at the wrong time and the yield generated by our two income funds should be able to support a sensible withdrawal strategy over the long term.”
