2 : 13 - Decumulation Factors to Consider Flashcards
Name 5 decumulation factors to consider
- Mortality
- Estate Planning
- Expenditure Needs
- The Investment Approach (short, med, long term)
- Taxation
What is the general issue with mortality?
People live longer than they expect.
Statistics show that life expectancy has been gradually increasing and it is possible to obtain statistics on the probability of living to certain ages. Therefore, life expectancy must be a serious consideration as there is a risk of an individual outliving their pension savings.
What would need to be included if one of a client’s objectives was to maximise the wealth they can leave to their family upon their death?
If this is the case, then a well-conceived decumulation strategy is required as a client will have to balance the amount of income they take from their pension with the size of the fund they wish to leave for their family.
How could this be achieved?
Some clients may decide to spend down assets in their estate to supplement their standard of living in retirement and to leave their pension untouched.
The advantage of this strategy is that the estate that is subject to IHT would be reducing while the pension remains exempt from IHT.
How can clients’ spending patterns in retirement vary widely?
For example, some clients could spend a lot in the early years of retirement by going on holidays or buying new cars as they could be healthy and able and want to enjoy their wealth.
In later years, they may spend less as they settle into a more steady and predictable spending pattern.
What is the common approach when considering the investment approach?
To divide the pension assets into three ‘pots’ for different time horizons
What would the Short-term investment approach involve?
This would typically be over a 12–24 month period and would be used for paying income to the client. The underlying investments would normally be cash or cash-like investments which are low-risk.
What would the Medium-term investment approach involve?
Typically a 5–10 year period and this pot would include investments that will be disinvested to replace withdrawals from the cash pot.
As investments in this pot have a longer time horizon, they would take the form of a diversified portfolio.
What would the Long-term investment approach involve?
Underlying investments in this pot would be invested for over ten years and therefore would be focusing on long-term growth. Over time, the assets in this pot would move to the medium-term pot followed by the short-term pot, before being withdrawn as income for the client.
When considering taxation, what needs to be known?
The client’s full income position should be known, for example, they may have income from other sources including bank interest, income from investment portfolios or property income.
In addition, the client’s future plans will play a key factor: for example, are they fully retired or are they planning on finding work on a part-time basis? When will they take their state pension or are they going to defer it?
Why would some clients like to draw tax-free cash on a phased basis from their pension?
This provides a tax-free income
