According to McInally, it is also important that portfolios are reviewed regularly as well as the level of income that is being taken.
She adds: “If more income is being taken to cater for higher inflation/costs it may be that the portfolio needs to be adjusted to allow for this.
“This will vary by individual but may involve, for example, holding more money in cash to meet shorter-term income requirements.”
Meanwhile, Poppy Fox, investment manager at Quilter Cheviot, stresses that it is important to stick to the fundamentals of investing: think long-term, and do not be afraid to take a reasonable level of risk with pensions given the time horizon.
Risk weighting?
People should also be cautious about de-risking too much on retirement.
A person who retires at age 65 today has a good chance of living into their 90s and although the pension pot needs to provide an income at that stage. It also needs to see growth so that the value of the fund keeps up in real terms.
Fox adds: “With inflation levels where they are at the moment regardless of how one looks to invest, it will be hard for portfolios to keep pace with inflation. It is important to point out though that inflation has started to fall and should move to more normalised levels as we approach the end of the year.
“However with inflation likely to stay above the 2 per cent target for now, making sure you take enough equity risk in the portfolio is important as this should provide better long-term returns.”
As well as positioning the portfolio for a world of higher inflation, understanding downside protection is also key.
To manage the downside protection in a retirement income portfolio, understanding the client’s capacity for loss and also getting them to fully be aware of up and down market movements will be key.
Fox says: “One can try and manage the downside protection with a well-diversified, risk adjusted portfolio but there isn’t a way to avoid this entirely and any investor should be aware that they will see periods of volatility and experience market downturns.”
Evelyn Partners’ Robson adds: “Investors and their advisors need to be disciplined with their hunt for returns and income.
“Ensuring the asset allocation (and in particular allocations to risk asset classes such as equities) is commensurate with the investor’s capacity for loss, risk tolerance and objectives is the most important factor, rather than being distracted by the dangling carrot of attractive returns in higher-risk asset classes.”
Another method, according to McInally, is for an annuity to be purchased to support essential spending requirements.
