Pension Planning: Have a decumulation plan and stick with it

21 Nov 2022

The last few days and weeks have shown the importance of having a well thought out plan and sticking with it. The alternative often leads to vacillation – as you are forced to react to unpredicted market-driven events. This sort of reactivity seldom leads to good outcomes for clients and often results in ever shorter periods before the next U-turn.

So, if your clients are saving into a pension at the moment and are still working, urge them to carry on paying their pensions contributions if at all possible. You may not be able to predict when currently depressed and skittish share and gilt prices represent a real bargain. However, there is a great deal to be said for that old adage, “it’s not timing the market that counts, it’s time in the market”.

Decumulation plans

If many of your clients are already retired and in decumulation , stick with the decumulation plan you will have agreed with them when they started taking income at retirement.

A well thought out decumulation plan will have scenario tested what to do when markets move. So, go back to it and follow it as far as is practicable. Almost certainly, some portfolio re-balancing will be needed now. The big price swings we have seen through 2022 will mean that some of your clients’ portfolios may now hold a higher or lower proportion of certain asset classes than was intended in the plan.

Investment Plans

A good investment plan will also have stipulated re-balancing frequency. Re-balancing is best done not too frequently, or you will be racking up transaction costs while chasing moving price targets. If the next re-balancing point is not for a few months, use the time to watch the progress of the asset class and funds that you have earmarked for your clients within the next re-balancing point. Stress test your decisions. Analyse whether events are moving against the re-allocations you have in mind.

Triggers in client pension plans

Another thing to consider is any triggers stipulated in clients’ decumulation plans. For the first time in a generation, we are now seeing annuity rates for a 70 year old of over 8% per annum. If your plan for some clients in decumulation states: “Start with income drawdown and buy some annuity when the rate reaches 8%”, then that trigger will be flashing green now – possibly a good few years before the plan originally predicted!

You will need to review your rationale for setting these sorts of triggers in the first place. If the original rationale still holds good, then buy some annuity. If not, then re-set the trigger appropriately. Be prepared to adjust the plan if markets are behaving more erratically or negatively than your plan originally allowed for.

As Helmuth von Moltke, the Chief of the General Staff of Germany’s Field Army at the outbreak of the First World War was quoted as saying (linked to the failing Schlieffen Plan which he adapted early on in the German invasion of France in 1914): “No battle plan survives first contact with the enemy.” Be prepared to adjust if market events prove more challenging than originally predicted.

But above all, don’t panic. The American retirement guru Don Ezra recommends that plans should hold sufficient cash. Even when stock markets are behaving like Blackpool’s Big Dipper, pensioners can continue to draw down from their cash portfolio, without undertaking a fire sale of assets at depressed prices. Carry on enjoying the Pleasure Beach until the dust has settled.

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