Cover Story
Doug Ryan, a wealth management
director at Mattioli Woods, says the
first step for anyone considering
drawdown is to seek financial advice.
“Advice is very important because
there are so many moving parts to
the maths that go into deciding how
to structure a drawdown strategy,”
he explains.
Ryan adds that all sources of income
should be considered at this stage,
including ISAs, savings accounts, the
state pension, other private pensions
and buy-to-let properties. A financial
adviser will then help you plan the
most tax-efficient way to take income
from the different savings pots.
Counting the pennies
At this point, Michelle Cracknell, chief
executive of The Pensions Advisory
Service, suggests dividing spending
plans into three categories: “essential”,
“would like to have” and “luxury items”.
“This will help you determine the
minimum income that you need. It is
often a good idea to have the majority
of the minimum income that you
need covered by guaranteed income
provided by the state pension, a
pension from a defined benefit
scheme and/or an annuity,” she says.
Cracknell also highlights the
potential tax implications related to
different drawdown strategies, which
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“Advice is very important
because there are so many
moving parts to the maths
that go into deciding how
to structure a drawdown
strategy”
will be linked to how you plan to take
your 25 per cent tax-free lump sum.
From the outset, it is also important
to consider the income that could
be generated from your assets and
whether there could be any shortfall.
For example, online fund broker
Hargreaves Lansdown offers its clients
a free personal drawdown illustration,
which shows how withdrawals could
affect their future income.
If drawdown appears to be the
right path for you after taking these
considerations into account, what are
your options?
Natural resources
The first is to draw a natural yield from
the portfolio. This means relying on
the income that is generated from
your investments in order to avoid
taking money out of the capital base.
However, if the income produced is
insufficient, you could be forced to dip
into the portfolio’s capital. This is ill-
advised during times of market stress.
The second involves running a large
cash element, so the retiree can avoid
FIVE POINTS TO CONSIDER
FOR A DRAWDOWN STRATEGY
By Peter Finnigan, Sanlam’s head of
private clients in the South West
1 What is the value of overall assets
available to draw on?
2 How much money do you require
each year? For example, will you
need to access a large one-off lump
sum over the next five years?
3 What are your plans over the long-
term? For example, do you plan
to downsize or make any gifts to
children?
4 Is there a shortfall between the
income that is being generated from
your assets and the income you
require to fulfil your plans?
5 How long would your assets last if
they saw no growth or fell in value
during the early years?
having to sell assets at depressed
prices. However, the downside is
that the cash buffer needs to be
replenished continually and can be
eroded by inflation over time.
Wealth manager Mattioli Woods
typically holds what equates to
between one year and 18 months’
worth of income for the client in low-
risk, cash-like investments.
This comprises cash deposits,
investments with short maturities
where the minimum maturity value is
known, as well as income-generating
assets such as property.
Recovery time
Ryan points out this cash buffer
can provide the portfolio with some
time to recover from a market fall.
Another pot is then invested with a
two- to five-year timeframe, while the
remainder of the portfolio is allocated
to higher risk assets such as equities
and is invested for the longer term.
In theory, this pot should be less
vulnerable to short-term market falls.
“One of the major issues when you
are in drawdown is if the cash is not
planned for properly,” Ryan adds.
However, Thesis Asset Management
believes there is one major pitfall
with the “cash buffer” approach.
The group says holding too much in
defensive assets for too long can limit
the portfolio’s ability to generate the
returns needed to sustain itself over the
long term.
With this in mind, the firm has
launched a managed income service.
This comprises a wealth-preservation
portfolio of lower-risk income-
generating assets, alongside a wealth-
accumulation portfolio of assets with
the potential to deliver growth and
income over the long term. During
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