Brooks Macdonald launches Decumulation: a new approach to retirement planning

Since pension freedoms began in 2015, over 1.8 million  people have accessed their defined contribution pension pot and tens of thousands more have transferred out of their defined benefit pensions. Income drawdown often becomes their first choice of investment  with nearly double the number of people who are taking out annuities . However, the development of new solutions for the opportunities and challenges posed by these new freedoms is in its infancy.

Brooks Macdonald, CEO, Caroline Connellan, says: “With the reality of pension freedoms, individuals are required to take responsibility for their income in retirement. However, with longevity and inflation risks, people are often uncertain how to manage their money and make it last through their retirement. That is why we have launched the Brooks Macdonald Decumulation Service. This takes an innovative approach to retirement drawdown, aiming to mitigate these risks and to give a greater degree of certainty over income throughout retirement.”

The Brooks Macdonald Decumulation Service, available exclusively through financial advisers, is for clients with a minimum of £500,000  to invest who are either withdrawing income from their portfolio or are set to do so within the next seven years. Designed for medium to high-risk investors, the service aims to reduce sequencing, longevity and inflation risks.

This bespoke service divides a client’s portfolio into two strands: a short-term portfolio and a long-term portfolio. The short-term portfolio provides 0-7 years’ income and aims to reduce sequencing risk. Uniquely for a service of this kind, the short-term pot is invested in a mixture of cash (typically providing income for the first two years) and structured return assets issued by major banks such as HSBC and UBS (maturing every six months, catering for the subsequent 5 years’ income).  

The other strand of the portfolio, the growth element, is designed to beat inflation risk over the longer term through investment in diversified assets at the client’s highest acceptable tolerance for risk. This will be through a multi-asset approach: with between 40% and 95% invested in equities.

Brooks Macdonald research (looking at more than a 100 years of data) and back testing has shown there is little benefit from maintaining a two-pot structure beyond seven years. Therefore, at the end of this period, once the seven-year pot has been exhausted, the long-term pot becomes the source of income. At this time and if required, a new short-term pot could be initiated dependent on the client’s needs.

John Wallace, Managing Director and Co-Head of UK Investment Management says, “Many pension savers who go into drawdown can be knocked out by a market downturn in the early years of retirement and never recoup their losses. Our unique dual strand portfolio is designed to control untimely sequencing risks. 

He concludes: “We feel our service can benefit clients in or approaching drawdown who, in this changing pensions market, may put their retirement income at risk from products or solutions not wholly appropriate for their specific retirement journey.”