A “simple solution” of withdrawing only the natural yield from a drawdown product to live on, known as guided drawdown, has been proposed as a fix to the retire-as-you-go generation’s desire for flexibility combined with life-long income.
Hargreaves Lansdown has proposed the idea in a new research paper, which stated that it is a “simple effective solution” for investors that want to know where to invest their money and how much to withdraw. The report stated that taking natural yield means that people in drawdown are not required to make decisions on when to buy or sell investments, but instead can rely on the income that is generated from holding their investments.
“The design of the investment approach is important, but so too is discipline around withdrawals from the pension; you could have the best investment strategy in the world but if you take too much income you’re still risking running out of money,” the report said.
It stated that withdrawing only the income generated by your pension investments is well suited to drawdown because it is relatively simple to understand, and dictates the income level as well as the investment strategy, which delivers inbuilt protection for individuals. Hargreaves Lansdown also argues that it provides a sustainable income so investors can be confident that they will not run out of money. It also does allow for additional capital withdrawals, but with a clear indication of implications.
On the idea of a retire-as-you-go generation, Hargreaves Lansdown noted that the transition from work to retirement is becoming more flexible and dynamic. Part-time working looks set to be increasingly important for older workers for both financial and social reasons, the report said. “This next generation will need to keep their options open and have a retire-as-you-go approach, to cope with all the twists and turns that come as they age. Many of these people don’t even think of stopping work, they think of how they can continue doing what brings them enjoyment as they age.”
The Financial Conduct Authority is currently finalising its Retirement Outcomes Review looking at the retirement choices made by consumers; Hargreaves Lansdown senior pension analyst Nathan Long noted that the regulator is “rightly concerned” about the risk of collateral damage created when “George Osborne tore up the retirement rule book with the introduction of pension freedom”.
“Increasing numbers of the retire-as-you-go generation want to get on with sensibly managing their retirement savings but some of them need help and guidance. Progressively fewer people will reach retirement with a defined benefit pension, so now is the time to focus on offering investors guided drawdown options. Drawing only the income generated by your pension investments – taking the natural yield – is a great simple solution for investors who know they want drawdown, but don’t know where to invest or how much they can take,” he said.
Furthermore, Long said that the word ‘default’ should be banished from retirement, as hugely personal choices don’t lend themselves to a one-size-fits all approach. “People want to keep their options open and stay in control of their changing circumstances. Life after work can last over 40 years, so income and investment strategies have to be built for the long term. This also means any guided solution has to involve active investment management to adapt to changing market conditions.”
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