UK wealth managers are increasingly allocating the assets of clients in retirement to growth assets as a result of the longer lifespans.
The life expectancy of someone in the UK in 1994 was just over 77 years but today it is closer to 81 years – an increase of four years over the last 30 years.
James Sullivan, head of Tyndall Partnerships, said: “If we consider the average retirement age is 64 for women and 65 for men, this leaves, on average, 16.5 years of retirement to fund plus of course the hope and expectation there is much more than that left for others.
"This creates something of a quandary for investment managers when constructing a portfolio to fund retirement and then some."
Lindsay James, investment strategist at Quilter Investors, said that as clients are faced with greater longevity risk and sequencing risk.
She said: “Once retirement age is passed, a client that is dependent on investments alone faces two clear risks, longevity risk and sequencing risk. Longevity risk is essentially the risk that they outlive their assets. Sequencing risk is the risk of withdrawing too much cash from a portfolio after a year of weak returns, potentially wielding a damaging blow on the chances that it can then provide the income required for future needs. “
Addressing those risks is on the mind of Daniel Pereira, investment manager at Square Mile Consulting, who said approaches to managing the issue can include lowering the proportion of the retirement pot a client extracts each year, retaining a cash buffer, or liquidity matching.
But he says including more growth assets, to enable the size of the pot to grow even as the client makes withdrawals from it is an option.
Fahad Hassan, chief investment officer at Albemarle Street Partners, said: “As people live longer, the risk of retirees outliving their savings has grown, suggesting portfolios may need to hold more equities than in the past to fund longer retirements.
"However, this must be balanced against ‘sequence of returns risk’ - the danger that poor returns in early retirement will permanently impair the ability to sustain withdrawals.
"The challenge is finding an allocation that provides enough growth to fund lengthier retirements, while mitigating the risk of large drawdowns early in retirement. Research suggests a dynamic approach to asset allocation, combining higher strategic equity exposures with tactical risk mitigation, may be optimal.
"Strategies which tactically dial down equity holdings in market downtrends can significantly improve the odds of sustaining income needs, compared to static 60/40 stock-bond allocations. The implication is that the standard approach of de-risking by shifting from equities to bonds over time is insufficient in a world of longer lives."
Simon King, chief investment officer at Vermeer Partners, said he regarded growth assets as the best protector against inflation, while also emphasising to clients the tax advantages for a client who garners an income through the sale of successful investments rather than from direct, or natural income.
david.thorpe@ft.com
