Platforum: Advisers maintain equity exposure in retirement portfolios

Heather Hopkins Platforum

Not long ago the received wisdom was that investors nearing retirement should decrease exposure to equities, investing in less volatile bond funds. However, Platforum research reveals that advisers favour equity to bond funds when advising retirees in drawdown.

The research reveals  advisers are most likely to recommend multi-asset, multi-manager and equity funds to investors in decumulation.

Indeed, eight in 10 advisers surveyed in June said they had recommended multi-asset, multi-manager or equity funds to clients in decumulation since the introduction of the pension freedoms. This compares with fewer than seven in 10 who had recommended bond funds.

Many blame quantitative easing for the low demand for bonds. No doubt stubbornly low interest rates are in part responsible for this shift to equity funds. However, demographics also have a part to play. People are living longer and need their retirement savings to last longer. This results in pressure to grow capital even in decumulation.

Last year when we did this research equity funds were on a par with bond funds. At that time we remarked at how much things had changed with
equity funds on an equal footing with bond funds in retirement portfolios.

With more than a year bet-ween us and the pension freedoms advisers are showing an even greater appetite for equity funds. Whether advisers are right to swing so far away from bonds is far from certain.

Annuity demand

Headlines in 2014 predicted the death of the annuity. Indeed annuity sales have fallen off. However, 60 per cent of advisers tell us they have recommended an annuity to an investor in decumulation since the pension freedoms. When advisers describe the characteristics of an annuity without using the term “annuity” the client’s response is often positive. The guarantees that annuities provide are still valued but the term annuity still turns off some investors.

We see that annuities are more popular outside the advised market. Investors who pay for professional financial advice typically have more money to invest and typically have a larger pension pot.

Many investors expected advisers to take a combined approach, recommending a combination of annuity plus drawdown. Platforum research shows that less than half (43 per cent) of advisers are recommending annuity plus drawdown to their clients. The app-roach here is to use an annuity to generate the client’s fixed expenditure (mortgage/rent, household bills, etc) and to use drawdown for discretionary expenditure.

The appetite for equities continues to rise. Let’s hope the markets rebound so that portfolio values will rise too.