Sententia Articles May 2019

In this Issue

This month's articles and Guest Spot take retirement strategies as a common theme.


Blending Retirement Strategies

Pensions freedom means there’s a need for innovation in designing and delivering investments in retirement, and the traditional “bucket” approach will only take us so far. This opinion piece from Henry Cobbe of Novia's DFM division Copia Capital Management explores a blended approach to decumulation investing. Read more here…


Inflation and Retirement Income

According to the Office of National Statistics, a 65-year-old man now has a 50% chance of living until the age of 87 and a 65-year-old woman to the age of 90. The erosion of spending power has long been a concern for retirees – but should it be? Read more here…


Secure Lifetime Income

In this week’s Guest Spot, we hear from Mark Stopard, Just’s Director of Proposition Development, about why they believe Secure Lifetime Income should be considered in your client retirement plans. Read more here…


Blending Retirement Strategies

The challenge

Pensions freedom has led to a need for innovation in designing and delivering investments in retirement.

There’s no silver bullet: I believe a “blended approach” makes sense – combining different pots for different retirement objectives.

The adviser’s role is to get the right combination of these strategies to match their clients’ retirement risk profile, also known as their “withdrawal profile”.



The basic bucket approach

This approach to retirement investing was developed by Harold Evensky of Evensky & Katz, an adviser firm in the US.[1]

The idea is that a client has three buckets: a cash bucket for near-term spending, a cautious portfolio for medium-term spending and a growth portfolio for long-term spending.  As clients withdraw capital, advisers recommend withdrawals from each bucket in turn, with the longer-dated buckets topping up the shorter-dated buckets.  A fourth bucket could be reserved for a deferred annuity that’s bought at 65 but starts paying out aged 80 or so.[2]


Evensky’s system is easy to understand, and easy to explain, but it creates some difficulties too.

Firstly, advisers are having to manage three pots, not one.  Secondly, advisers are going to have to “call” the market to decide when and how much to move from bucket to bucket.  Lastly, whilst it may look like three buckets, in reality there is one overall asset allocation and it is the management of that allocation that will determine the overall portfolio outcome.

Building on the bucket approach

I believe it’s possible to improve on the bucket approach by having purpose-built strategies for each bucket such as multi-asset time-dependent portfolios.  This enables a managed approach to overall investment risk both individually and in aggregate. 



Traditional buckets

Smart buckets

Near-term portfolio


Cash, money market funds, ultrashort bond ETFs

Medium term portfolio

Cautious portfolio

Medium-term multi-asset portfolio

Long term portfolio

Growth portfolio

Long-term multi-asset portfolio

Guaranteed Income

Deferred annuity (US only) purchased aged 65 for lifetime income from 80 years old

Later life progressive annuity purchase from 75 to 85


Whilst time dependent retirement portfolios are the mainstay of a smarter approach to bucket investing, owing to their flexibility, return potential and duration targeting, I believe there is potential to enhance overall client outcomes by incorporating guaranteed income into a retirement plan in later life.



Guaranteed income as longevity insurance

There is a strong case for use of Guaranteed Income as longevity insurance: insuring against the risk of a client outliving their assets.  But isn’t that just an annuity?  Well yes, but used in a different way.

Pensions Freedom was triggered by the combination of rising life expectancy and falling interest rates, which meant that annuities offered poor value for those aged 65.

In fact, there was no problem with annuities; there was a problem with how they were used.  Life expectancy had moved from 68 in the 1930s to 85 in recent years.  But the state pension age (and normal retirement date/annuitisation age) of 65 had not really changed.

Annuities offer the perfect hedge to longevity insurance, but offer best value at the point at which longevity insurance is worth having.  According to Milevsky,[3] the optimal point of annuitisation is at life expectancy.  At this point, annuities offer good value for money.

Why annuitise later?

From my point of view, annuities still have a key role to play in retirement planning but they do so in later life, e.g. reaching an annuitisation target at or around life expectancy.

However, I recognise that for psychological reasons locking in an increasing amount of peace of mind is important for client experience and also as a protection against the risks of cognitive decline.

Advisers and clients can decide an “annuitisation” target such as 100% annuitised by 85, or 50% annuitised by that age and so on, depending on client needs and objectives.

In the US, the availability of deferred annuities means you can buy an annuity, for example, at 65 - but the income stream only kicks in once you are 80.  You effectively lock in a future certainty now, but get a better rate by deferring the income stream until you are older.

In the UK, in the absence of deferred annuities, we can achieve the same effect through later life annuity purchases (e.g. purchasing an annuity at age 85).

However, conversion of a retirement pot at a single point in time based on the current 15 year gilt yield creates a “conversion risk”.  Clients annuitising their whole pot now could get a better rate in a few years’ time if gilt yields rise a bit from current lows.

To mitigate this conversion risk, I’m an advocate of “lifestyling” into a blended annuity rate via a series of progressive annuity purchases.  This is like “pound cost averaging” into an annuitisation portfolio. This could be done over ten years from 76 to 85, or whichever time frame and to whichever age advisers and clients agree.

The pick-up in annuity rates from deferring annuity purchases to later life is illustrated in the chart below.   Unsurprisingly, each year the client gets older, the annuity rates improve.


Indicative level annuity purchase rates by age based on £50,000 purchase by average health client in PO1 postcode.

Actual rates will vary. Chart Source: Copia Capital Management; Data Source: JUST. Data as at March 2019.


This way, advisers can mitigate “conversion risk” by getting a blended annuity rate, as well as a progressive amount of certainty regarding future retirement income.

Any amount of the portfolio outside the annuitisation target can remain in a time-based retirement portfolio.


The bucket idea is easy to understand, but this simple framework brings complex problems, and places on advisers material responsibility for managing an aggregate asset allocation in addition to selecting the right client withdrawal profile.

By taking a smarter approach to bucket investing – using managed time-dependent portfolios such as target date or target term strategies, retirement portfolios can be aligned to the time-frame of each retirement bucket.

Advisers can decide with their clients each year on appropriate withdrawal rates; on appropriate allocations to near, medium and long-term managed portfolios; on annuitisation targets and on the pace and time-frame of progressive annuity purchases. The purpose of all this is to match the evolving needs and objectives of clients in decumulation, and those are the key decisions where advisers can add most value in retirement advice, at a time when it is needed most.




[3] Moshe Milevsky, Life Annuities: an optimal product for Retirement Income (2013)




Inflation and Retirement Income

Is inflation a problem?

It is easy to understand why inflation is a concern for many. Especially for those who lived through periods of high inflation during the 1970s and 80s, the thought of having purchasing power eroded is a real fear.

On reaching full retirement, defined contribution investors have their state pension plus a finite pot of money to see them, and possibly their spouse, through their retirement years. While it’s great news that people are living longer, it does present a financial challenge. According to the Office of National Statistics, a 65-year-old man now has a 50% chance of living until the age of 87 and a 65-year-old woman to the age of 90.  How do people know if their savings will last?

Spending in retirement

The ONS research data shows that the average household headed by a 65-74 year-old spends £373 per week. With a couple each earning the full state pension of £168.80 per week we can see that the state pension covers around 90% of the household’s day-to-day costs, including things such as transport and leisure.

This traditionally leaves investors with the choice of either investing for longevity to top-up that pension shortfall, or investing for growth. The decisions made at retirement have often been driven by the long accepted theory that investors will experience a ‘U shaped’ spending path in which their spending is relatively high at the beginning, then drops as they get into the next phase of retirement (mid 70s), and then increases again towards the end of retirement due to the costs associated with later life, namely care and support.

However, the International Longevity Centre’s (ILC) “Understanding Retirement Journeys” report has highlighted some key factors to consider:

>         A household headed by someone aged 80 or above spends, on average, 43% less than a household headed by a 50-year-old.

>         Individuals aged 80 and over are saving, on average, around £5,870 per year.

This flies in the face of the generally accepted belief that spending necessarily increases in the later years. Indeed, the Office of National Statistics annually collects data that estimates the levels, sources and distribution of pensioners’ incomes. This too was supportive of the theory that spending decreases with age, again reinforcing that longevity of income is key rather than focussing on growth to accommodate increased spending in later years.



% retired

Weekly £ on transport

Weekly £ on Housing

Total Weekly £

Ages 50-64





Ages 65-74





Ages 75 and over






So, whilst inflation is always going to be a concern in retirement, it should perhaps best be considered when set against diminishing spending requirements.

The State Pension – inflation linked

The State Pension is fundamental in providing Investors with a basic level of income designed to meet some of their essential expenses associated with retirement, such as housing, food, utilities etc. The level of state pension rises every year by the highest of 2.5%, growth in earnings or Consumer Price Index (CPI) inflation. Since the inflation rate is lower than average wage growth, which was 2.6% in July 2018, it is wage growth that has determined the level of 2019’s state pension rise. This meant an above inflation increase for retirees.


New state pension (weekly)

New state pension (annual)

6 April 2018 – 5 April 2019



6 April 2019 – 5 April 2020*




+£4.25 per week

+£221 per year


Finding the right balance

History suggests that when inflation is higher and more volatile, there is a correlating increase in volatility for stocks and shares. For that reason, it’s very difficult to find reliable inflation-resistant or inflation-protected assets in retirement. However, those who are concerned about increased spending requirements in later life may be more inclined to put everything into a portfolio that looks to make gains above inflation by investing in the stock market.

Those who are wary of inflation but anticipate a diminishing spending path in retirement in line with the ILC/ONS findings may prefer a combined approach. By placing some of their savings into an investment portfolio, in addition to buying a secure income underpin that can supplement the State Pension, they can cover life’s essentials whilst still investing for an uncertain future.



Guest Spot - Secure Lifetime Income


In this week’s Guest Spot, we hear from Mark Stopard, Just’s Director of Proposition Development about why they believe Secure Lifetime Income should be considered in your client retirement plans


What are your plans to ensure your clients don’t run out of money in retirement?

Decumulation is arguably the emerging theme across the adviser community as well as becoming a key focus of the regulator.

Up to now there has been very little product innovation despite the obvious need for new retirement income solutions for clients.  We’ve developed Secure Lifetime Income (SLI) to provide a brand new option, which meets clients’ retirement needs for security and flexibility with the advisers’ need for efficiency and alignment to their business model.

SLI provides a variety of benefits including:

  •  the security of a guaranteed income for life for your clients
  •  a unique cash-in value
  •  a death benefit
  •  tax-planning opportunities

And all this can be managed within a SIPP, where you do business – on a platform.


Central Investment Proposition or Central Retirement Proposition?

Traditionally, adviser models for generating pension savings have used Centralised Investment Propositions to maximise the value of client portfolios by turning income into capital over the long term. 

What are less established are standardised Centralised Retirement Propositions to decumulate pension assets and turn the client’s capital into income. 

During the accumulation phase a client’s attitude to risk is the key driver of an appropriate investment strategy.  However, in decumulation it’s essential to also consider the client’s capacity for loss to ensure they have enough money to live on in the event of falling markets.

Clients will also be investing for income rather than growth in retirement and in most cases the time horizon will be unknown, whereas accumulation generally has a target end date.

  • Secure Lifetime Income is a platform SIPP asset that enables you to secure a guaranteed income to work in conjunction with the other SIPP assets.  This underpin will mitigate any impact from falling markets and help secure the client’s capacity for loss.


How can you ensure your client does not run out of money in retirement?

There have been numerous studies on how much can safely be withdrawn from a SIPP to provide a sustainable retirement income. 

Just looked at this from a different angle with global actuaries, Milliman.  They looked at what would happen if guaranteed income replaced the bond element in drawdown portfolios to facilitate a blended underpin.

Milliman modelled a typical drawdown investment strategy (a mix of equities and bonds) and a strategy that replaced the bond element with a guaranteed income for life with a drawdown fund (investing purely in equities).  These two strategies were modelled using a range of economic and market conditions for various consumer preferences and circumstances.

The modelling showed that the relative merits of the two strategies vary in line with a range of factors including the client’s age, health, their preference for a fixed or inflation linked income, ongoing fee levels on the drawdown funds and the asset allocation.

The analysis suggests that people could boost their income in income drawdown (or improve the sustainability of income) if they add a guaranteed income for life to part of their assets. And this strategy could also increase any legacy payable on death.

  • Secure Lifetime Income underpin de-risks income sustainability and ensures there is no risk of ‘running out of money’.


How long does your client’s drawdown portfolio need to last?

It might be tempting to simplify the longevity question and assume an ‘average’ life expectancy but if a client has an average life expectancy of 85, by definition half the people will still be alive at that point and could be for many years. 


The Office of National Statistics data shows life expectancy varies between gender and UK countries and regions.  For example, life expectancy for a 65 year old man in England is highest in Kensington and Chelsea (where he’s expected to live a further 21.6 years) and lowest in Manchester (where the corresponding age is 15.9 years)[1]


So, even before an adviser considers any specific client factors, such as health, weight and smoking etc. it’s already clear that you cannot rely on average age to plan.

  •  Secure Lifetime Income has been made available within the Novia SIPP to answer this fundamental longevity question.  It provides certainty of income for life and enables you to build longevity protection into your retirement portfolios.


So what is Just SLI?

Just is one of the UK’s leading providers of specialist financial services solutions, completely focused on meeting the needs of people thinking about, approaching, or in retirement

SLI is an innovative solution that is set up within a client SIPP alongside their other assets.  This means you can blend investment funds and guaranteed income within a single SIPP to help you design a blended retirement income solution for your clients on platform.


The solution has been designed with Spire Platform Solutions, a financial technology company that sits between Just (and any future SLI providers) and Novia, to ensure the purchase and administration process runs smoothly and efficiently. 

The main client benefits include:

  • Guaranteed income for life
    SLI provides a personalised guaranteed lifetime income that compares to current pension annuity rates.
  •  Death benefit
  • A guaranteed lump sum death benefit which starts at 75% of the purchase price and runs off at twice the monthly income.  It is paid if the client dies during the set death benefit period.
  •  A cash-in option
  • Uniquely, if your client’s circumstances change significantly, they are able to cash in their SLI during the cash-in value period providing peace of mind in making the purchase decision. As with the death benefit the cash-in value starts at 75% of the purchase price and reduces by twice the income paid (although it could be subject to market conditions).
  •  Simplicity
  • All the client’s investment funds and their guaranteed income can be held in one place with one P60 and a single portfolio view making managing income much easier.
  •  Tax efficient
  • Because income is paid into the SIPP clients can choose when to withdraw income for tax efficiency.


It’s great for advisers too…

As well as all the client benefits SLI provides, it will also help advisers offer a guaranteed income for life in a simple, easy and modern solution.

  •  A modern way to meet client needs 
  • The ability to offer a blended retirement income solution as part of your retirement proposition within the client SIPP and help protect against capacity for loss and longevity risk.
  •  Business efficiency 
  • A process designed to work with your businesses and investment management models with a new unitised guaranteed income platform asset, an online underwriting, quote and apply process and a comparison tool from Spire Platform Solutions to help you compare against traditional annuity rates.
  •  Ongoing de-risking option
  • A simple way to progressively de-risk client portfolios by buying additional slices of SLI as they get older and their risk appetite and capacity for loss changes.
  •  Management opportunities
  • A reviewable asset with flexibility for you to recommend how and when income is taken to match client needs and minimise tax.  Initial charges are facilitated via the platform and for any ongoing adviser charges these are facilitated via the SIPP.

You can find out more about SLI by calling your Novia Regional Sales Manager or Account Manager or via the product literatureYou can try out the Quote portal on the new Adviser Zone with either specific client details or example client personas.