Drawdown market booms, investment strategies playing catch up
- The number of retirees opting for drawdown has more than trebled since the introduction of the pension freedoms
- But retiring investors are choosing funds with long-term investment targets to meet near-term income needs
- Multi-asset strategies are most popular, with investors favouring established brands over more tailored new entrants
- Increased market exposure could compromise incomes if markets fall
The retirement income market has changed dramatically in the two years since the pension freedoms launched. Drawdown has become the most popular option for retirees, growing from 15% of retirement income sales in Q3 2013 up to nearly half (46%) by Q3 2016*. But, according to new figures from Aegon, drawdown investors are sticking with familiar strategies and well-known fund choices, rather than newer, more tailored drawdown solutions.
Aegon’s research compared investment choices made by its drawdown and non-drawdown platform investors [i.e. those still saving for retirement], and found they only differed slightly, despite drawdown investors having different demands on their money and generally shorter investment time frames. For those in drawdown, the largest investment flows over the past year** were into multi-asset strategies (45%), with equity growth second (18%), bonds third (15%) and equity income fourth (12%). This largely mirrors the strategies used by non-drawdown investors who also favour multi-asset strategies (46%), followed by equity growth (24%), bonds (12%) and equity income (8%).
Investors are replacing some equity growth with equity income, and Neil Woodford’s fund is dominating the cash flow figures in the equity income sector. However, most are using multi-asset strategies to manage the balance between risk and return.
Aegon’s analysis suggests that retired investors using multi-asset investments are reducing risk. Across a sample selection of six multi-asset fund ranges, most drawdown investors are in funds at risk levels three or four on Distribution Technology’s 1-10 risk scale, compared to most non-drawdown savers investing in risk profiles four or five***.
Aegon does, however, raise a note of caution. Investors have experienced broadly positive markets in the two years since the new pension rules were introduced, but a significant market shock could wipe years off retirement income unless investment strategies are de-risked to meet the particular requirements of retired investors.
Nick Dixon, Investment Director at Aegon, said: “Drawdown’s popularity has rocketed since the pension freedoms, but retirees’ investment choices are still adjusting to the needs of those that choose to remain wedded to the markets in retirement. Drawdown investors, are largely favouring tried and tested brands and investment strategies over newer, more tailored options.
“As a result, there is a mis-match between the long-term growth objectives of many of the strategies being used, and the near-term income needs of retirees who use them. Retirees are also now more exposed to market highs and lows than they have ever been.
“While most drawdown investors have benefited in the largely buoyant markets witnessed since the new rules came into force, the strategies used haven’t yet been tested by a Dotcom or credit crunch style market shock. Our hope is that the market evolves further before one occurs.
“In an environment where there is not yet an accepted wisdom about the sorts of investment strategies that should be used in retirement, advisers have an opportunity to create real value by providing investment advice for an expanding list of drawdown clients. We offer a range of drawdown funds aimed at helping advisers do just that, including funds that offer a guaranteed income for life. There’s no such thing as a watertight strategy, but helping clients to create sustainable incomes in a market still in its infancy will prove an invaluable service at a critical time.”
**Aegon analysis of non-drawdown and drawdown investors as at end March 2017
***Aegon platform assets under management as at end March 2017 for six multi-asset fund ranges: Aegon Core Portfolios, Seven Investment Management AAP, Arcitas Multi Asset5, Fidelity Multi-Asset, Standard Life MyFolio Market and Vanguard LifeStrategy
- ENDS –
Notes to Editors
- In the UK, Aegon offers retirement, workplace savings and protection solutions to around two million customers, and employs more than 3,450 staff. More information: https://www.aegon.co.uk
- As an international life insurance, pensions and asset management company based in The Hague, Aegon has businesses in over twenty five markets in the Americas, Europe and Asia. Aegon companies employ over 28,000 people and have millions of customers across the globe. Further information: www.aegon.com
- Aegon is the Lead Partner of British Tennis.
Aegon is a brand name of Scottish Equitable plc. Scottish Equitable plc, registered office: Edinburgh Park, Edinburgh EH12 9SE. Registered in Scotland (No. 144517). Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 165548. An Aegon company. www.aegon.co.uk
© 2017 Aegon UK plc.