At We Complement, we’ve been delving deep into the elements that constitute an exceptional Centralised Retirement Proposition (CRP). A CRP is more than merely a Centralised Investment Proposition (CIP) modified slightly for retirees. It should offer a reliable, repeatable, and consistent procedure for managing clients in the decumulation phase, with an emphasis on financial planning aspects that are particularly crucial at this life stage. This article aims to highlight areas to contemplate while devising an appropriate and sustainable withdrawal strategy for your clients. This article is not intended to be an exhaustive checklist of what a CRP should include, nor does it favour one strategy over another. Instead, it aims to stimulate thoughtful discourse and consideration. We hope it offers some valuable insights!
How do you determine the sustainable withdrawal rate for your clients?
Clients typically rely on their pensions to sustain them throughout their remaining years, necessitating guidance to discern the ideal withdrawal amount to ensure their pension does not deplete prematurely. The calculation of this figure is a challenging process, not necessarily an exact science, underlining the importance of documenting your methodologies and the reasoning behind them. Having this documentation can provide a solid defence should a client question or challenge your conclusions in the future, demonstrating the how and why of your calculations. What considerations factor into your sustainable withdrawal rate? Do you adhere to the often referenced 4% sustainable withdrawal rate proposed by William Bengen, or do you modify this percentage for UK investors? How do fees impact the sustainable withdrawal rate? Do you consider that the sustainable withdrawal rate might change for portfolios with different asset allocations? Do you apply a uniform sustainable withdrawal rate to all clients? What research and evidence support your approach? Determining a suitable withdrawal strategy is a significant aspect of assisting your clients with retirement planning. Your CRP is the perfect place to justify your thought process.
How much are you allocating to cash?
As discussed in last week’s newsletter: CRP Deep Dives: Decumulation Risks, sequencing risk can significantly influence the longevity of a pension pot. To mitigate this risk, some advisers adopt a bucket strategy or maintain a certain amount of cash ready for withdrawals. Some advisers avoid this approach and don’t place any more importance on cash than they would for an accumulation client.
Both approaches have their merits and can be backed by compelling arguments. The critical factor is to clarify your methodology and substantiate the reasoning behind it. This clarification promotes a consistent procedure across the firm and among clients, ensuring that your advice is robust, well-founded, and evidence-based.
What if things don’t go to plan?
The unpredictability of the future plays a significant role in making retirement planning a challenging task. Unforeseen events such as market downturns or significant life changes can disrupt even the most meticulously crafted plans, underscoring the need to prepare for the unexpected. What measures do you implement to counteract unexpected occurrences? Do you frequently engage in discussions about contingency plans with your clients? If so, at what stage do you determine that it’s necessary to resort to these contingency plans?
What probability of failure are you comfortable with?
Choosing a sustainable withdrawal rate often requires balancing a higher income against the risk of depleting the portfolio. Some clients might favour the potential of a higher income, despite the risk of it running out, as opposed to the certainty of a lower, but enduring income. Your CRP could be an opportunity to document the level of uncertainty you are typically willing to tolerate when deciding on a sustainable withdrawal rate, the reasoning behind that tolerance, and how you approach this compromise with clients.
Assumptions about longevity
Predicted longevity is a crucial factor in determining the sustainable withdrawal rate, and your methods for estimating probable longevity can be documented in a Centralised Retirement Proposition (CRP). Do you use a standard life expectancy for all clients? Do you rely on longevity data from authoritative sources like the Office for National Statistics? When advising a couple, do you factor in the likelihood of at least one partner reaching a specific age, or do you evaluate their life expectancies independently? Your CRP is the optimal platform to outline the assumptions you make regarding longevity and the process by which you arrive at these assumptions.
Establishing a resilient CRP requires recognising and mitigating risks to assure clients of a secure and sustainable retirement income. It’s crucial to craft strategies that resonate with clients’ risk tolerance, objectives, and personal circumstances. Although CRPs may not be heavily regulated, integrating these risk considerations can significantly enhance the quality and efficacy of your retirement planning services. If you’re contemplating a review or implementation of your CRP, consider enlisting the expertise of our seasoned professionals. We specialise in constructing bespoke CRPs, finely tuned to meet your clients’ distinctive needs. Get in touch with us either online or by dialing 01472 728 030. We’re at your service, ready to deliver top-notch due diligence and investment research services.