Retirement Portfolio Service

At AJ Bell Investments, we think that many accumulation strategies should retire when the client does. The question is, what do you replace them with?
Our solution is the Retirement Portfolio Service (RPS) – a low-cost Centralised Retirement Proposition designed in conjunction with advisers, for advisers and their clients looking for income in retirement in a world of flexibility and pension freedoms.

Benefits of the RPS

  • Designed in conjunction with advisers for advisers
  • A flexible discretionary portfolio service that leaves you in control
  • Reduces sequencing risk
  • Simple to understand and explain
  • Transparent disclosure of the underlying portfolios and their Ongoing Charge Figures (OCFs)
  • No investment charge on the cash element of the portfolio
  • Investment charges capped at 0.9% p.a. (based on the standard initial portfolio weightings)

The value of investments can go down as well as up and your client may not get back their original investment. Full details of the specific risks are available in the RPS adviser guide.

Designed in conjunction with advisers from around the UK, our RPS brings together a range of strategies used to help clients deal with the complexities of investing and meeting ongoing income requirements in later life and, in particular, the problem of sequencing risk.

Sequencing risk

At its simplest, sequencing risk acknowledges that the ‘order’ in which investment returns are experienced can have a larger impact on the end result if investments are being sold along the way. If investments are sold after a fall in value, the remaining funds would need to work harder to make that loss up – especially if those losses come early on in the journey.

For clients drawing down on their investments, this means that the early years of retirement can be particularly precarious, given that this is when sequencing risk is at its highest.

How to protect against sequencing risk

Sequencing risk can never be completely removed, but there are some strategies that can be used to manage it.

1. The ‘4% Rule’

Backtesting shows that if a pension pot was invested in the RPS, at outset, and no more than 4% of the initial amount* is removed from the portfolio in any given year, there hasn’t been a series of returns from markets over the last century that results in the monies running out over a 30-year period or retirement life. That includes two World Wars and periods of high inflation as seen in the 1970s.

*increased in line with inflation. Figures refer to simulated past performance and past performance is not a reliable indicator of future performance. Simulated past performance is calculated gross of fees.

2. Bucketing

By splitting the investment pot into a series of simpler strategies, ‘bucketing’ helps clients understand what is going on with their funds. Typically, the monies are split into three ‘buckets’, each of which is designed to be used over a different time period.

Short-term cash bucket Medium-term bucket Longer-term bucket

Since sequencing risk is at its highest in the early years, the immediate income needs of your client are held in cash.

Built primarily of lower risk investments such as government and corporate bonds, plus some exposure to income producing shares, the medium-term bucket is designed to generate a consistent level of income and to hold its capital value.

Consisting of more risky assets like shares and property, the longer-term bucket should grow in value as well as generating an income that also grows over time.

3. Natural income

The ‘natural income’ strategy involves choosing investments that should produce an income to fund the client’s lifestyle. This reduces the need to nibble away at the capital and so lowers the risk of having to sell the investments after a fall in value – which is the source of sequencing risk.

4. ‘Smart Rebalancing’

Less prevalent, but just as powerful in reducing sequencing risk, is the idea of banking profits along the way. Since the length of retirement is unknown but can last a long time, it is inevitable that over the retirement journey, there will be periods of strong gains as well as times in which investment values may fall sharply. With ‘Smart Rebalancing’, the need to sell after a fall is reduced by taking profits only after the gains have been banked. If neither of the conditions are met, the portfolio is not touched, giving any investment losses the benefit of time to recover.

Putting it all together

Combining four well-known retirement income strategies in a single solution, the Retirement Portfolio Service from AJ Bell Investments provides a simple, transparent, low-cost way to manage your client’s investment needs in later life.

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