Retire In Peace (RIP) Selecting a sustainable Retirement Income Proposition

Transcription

1 Retire In Peace (RIP) Selecting a sustainable Retirement Income Proposition Prepared for Professional Clients only Any views and opinions are those of the presenter, unless otherwise noted and is not investment advice.

2 Learning objectives Common strategies determining how best to generate income at retirement Sustainable withdrawal rates and the key challenges associated: longevity, inflation and pound cost ravaging The practical application of investment strategies to generate income at retirement 2

3 Annuity rates are depressed Annuity rates 1 Source: /02/16. Annuity cost = 100,000. Based on 65 year old male, single life, no escalation or guarantees and no tax-free cash (PCLS) taken. 3

4 Radical changes to UK Pensions Flexible access to pensions from 55 TAX Death tax pre 75 abolished Pension income (drawdown) restrictions abolished Access to guidance A massive opportunity for advice 4

5 Centralised Retirement Proposition From CIP to CRP Drawdown was about 5% of adviser business in 2014 By 2024, drawdown could be 80% of adviser business* 97% use Centralised Investment Propositions (CIPs) as risk rated solutions for wealth accumulation** Risk rated CIPs will not be fit for purpose as a decumulation alternative to annuities says evalue *Source: Standard Life, June 25, 2015, published in Retirement Planner **Source: evalue survey of 4,500 advisers, published 14/05/15 5

6 Don t just chase the best performers. In Accumulation destination is key. In Decumulation journey is key. No withdrawals Simulated Example 50,000 per annum withdrawals Simulated Example 3,000, ,200, ,500, ,000, ,000, ,500, , , ,000, , , , FUND A FUND B - FUND A FUND B Fund B has a higher annual return (5.42% vs 5.11%) Over a 20 year period, this adds up to significant outperformance (168% vs 139%) It outperforms A in 11 of 20 years For illustrative purposes only When selling units for income, end result is counterintuitive Fund A outperforms this time Check volatility profile if selling units or use income for income 6

7 Selecting a sustainable withdrawal strategy Eating into capital but at what pace?

8 Sustainable Withdrawal Rates Methods for calculating systematic withdrawals vary Static versus market-sensitive % initial balance versus % current balance Indexing for inflation Experts disagree on what constitutes a safe or sustainable withdrawal rate 8

9 Risk of Ruin % Figure 1 Sustainable Inflation-Adjusted Withdrawal Strategies For Different Retirement Lengths and Failure Rates For a 40% Fixed Stock Allocation and Market Assumptions Defined in Text years Source: Retirement Lengths, Withdrawal Rates, and Failure Probabilities, by Wade Pfau, Ph.D., CFA, July 19, 2013, CFA and Chartered Financial Analyst are registered trademarks owned by CFA Institute 9

10 Sustainable Withdrawal Rate: Longevity Considerations Within 20 years 30% of the UK population will be over 65 Life expectancy at age in 5 1 in years 21.1 years Men Women Sources: ONS

11 Inflation Risk: Loss of Purchasing Power Loss of Purchasing Power over 30 Years For illustrative purposes only 11

12 The Implications of Pound Cost Ravaging Beginning Balance: 100,000 Annual Distribution: 5,000 Average Annual Return: 7% Time Horizon: 30 Years 25% 20% Portfolio Value 15% YR. 20: 167,639 10% YR. 25: 204,357 YR. 30: 256,205 Return 5% 0% -5% Portfolio Value -10% YR. 20: 22,481-15% YR. 25: 5,014 YR. 30: 0-20% Years For illustrative purposes only 12

13 Strategies to help manage pound cost ravaging Low volatility strategies at the core To counter the prospect of pound cost ravaging, low volatility strategies can be used to help protect capital Potentially losing out on upside But capital protection and income/lifestyle maintained Aiming to deliver a positive return in all market conditions, although this is not guaranteed 13

14 Newton Real Return Fund Investment objective Performance aim A total return comprised of long-term capital growth and income by investing in a broad multi-asset portfolio The Fund aims to deliver a minimum return of cash (1 month GBP LIBOR) +4% per annum over 5 years before fees. In doing so, the Fund aims to achieve a positive return on a rolling three year basis. However, a positive return is not guaranteed and a capital loss may occur. Launch date 1 September 1993 An unconstrained active multi-asset strategy seeking lower volatility Emphasis on long term investing and with an aim of capital preservation Top tier, London based investment house with over 30 years of global fund management expertise Newton is renowned for its distinctive and proven global thematic investment approach, which is consistently applied across all strategies Dedicated global research analysts drive the Fund s investment policy Transparent, single portfolio of direct, liquid investments Maximum flexibility at the portfolio construction level; emphasis on traditional asset classes no asset allocation constraints 14

15 Newton Real Return Fund Calendar year results since inception (31 March 2004) Newton Real Return Fund 1 month GBP LIBOR + 4%¹ (%) MSCI World (NR GBP)² CY volatility Since inception (annualised) Portfolio (%) MSCI World Index NDR (%) Notes: 1. The fund has a performance reference of cash (1 month GBP LIBOR) +4% per annum over 5 years before fees. 2. Comparisons are made to demonstrate correlation only and are for illustrative purposes only. 3. Calendar year volatility calculated using monthly data points. Source: Newton, as at 30 April March 2004 to 31 December 2004 Source: Newton, as at 30 April 2016, net of fees, COB prices 15

16 Selecting a Retirement Income Strategy Is there a different way to produce income without eating into capital?

17 Retirement Income Proposition Practical, easy to implement Distinct from growth strategy Opportunity to charge appropriate fee Need Income source Reason for inclusion Fun Factor Low volatility fund - unit encashment Multi-Asset income fund - natural income Growth (Capital Preservation) + Income top up Income and Growth Eat & Heat Guaranteed Income Product / Annuity State Pension Income certainty Income certainty 17

18 Strategies to offer both Income and Growth Potential Addressing Income needs and Legacy Planning Using Income for Income Draw the income generated from underlying investments - Leave capital intact to (hopefully) grow If natural yield insufficient, can withdraw capital but clearly inherent risks - Pound cost ravaging 18

19 The Benefits of Income-Yielding Assets vs Unit Encashment Markets Rise Income remains stable Markets Fall Income remains stable Year 1 Year 2: markets rise Year 1 Year 2: markets fall Share price No. of shares 100, ,000 Capital value 100, ,000 Dividend per share 5p 5p Yield 5% p.a. 4.2% p.a. Income 5,000 5,000 Share price No. of shares 100, ,000 Capital value 100,000 80,000 Dividend per share 5p 5p Yield 5% p.a. 6.3% p.a. Income 5,000 5,000 Source: BNY Mellon research, May For illustrative purposes only. 19

20 Newton Multi-Asset Income Fund Strategy type Objective Income reference Global multi-asset income To provide income with the potential for capital growth 60% equities 40% bonds 1 Wide range of assets can invest in: Cash Corporate bonds Derivatives Equities Government bonds Convertible bonds / preference shares Alternatives Aims to yield 30% more than reference yield Paid quarterly A fully flexible multi-asset strategy Emphasis on long term investing and focus on income Single portfolio aiming to source the best income producing opportunities across asset classes and the capital structure Note: 1 The 60% MSCI AC World, 40% hedged BoA ML global broad market index is used as a comparative index for this strategy. The strategy does not aim to replicate either the composition or the performance of the comparative index The power of perspective, income and flexibility 20

21 Income diversification has moved on 21

22 Diversified source of income For illustrative purposes only. Source; Newton as at 30 June

23 Track record, 5 February 2015 to 31 July 2016 Newton Multi-Asset Income Fund Cumulative total return (%) Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Note: 1 Actual income received pro rata over the month received for illustrative purposes Source: Newton as at 31 July 2016 Total return Actual income received¹

24 Implementing a Retirement Income Proposition Hybrid arrangements Combining secure income with growth potential

25 Inheritance Planning Why to leave a legacy? Death tax pre 75 abolished means increased importance on inheritance planning via pension Rising house prices making it even more difficult for first time buyers: Average UK house price 189k¹ Average UK income 27.6k¹ University fees; the average student now graduates with > 40k debt Average wedding > 20k 1. Source: accessed 9 May

26 Retirement Income Proposition 300k starting capital, 20k income per annum needed with legacy Need Income source Starting Capital Income per annum Capital after 18 years - historic average Capital after 18 years - conservative Fun Factor Newton Real Return (unit encashment) Newton Multi-Asset Income (natural income) 125,000 4, ,400¹ 142,119² 125,000 5,528³ 300,827⁴ 194,957⁵ Eat & Heat Annuity 50,000 2, State Pension 0 8, ,000 20, , ,077 ¹ Based on annualised growth rate of 7.57% since inception to 31/08/16, adjusted for units sold, net of fees ² Based on annual growth rate 50% lower than historic average (inception to 31/08/16) i.e. 3.79%, adjusted for units sold, net of fees ³ Income earned over one year to 31/08/16 ⁴ Based on annual capital growth rate of 5% since inception to 31/08/16 with income not reinvested, net of fees ⁵ Based on annual capital growth rate 50% lower than historic average (inception to 31/08/16) i.e. 2.5% with income not reinvested, net of fees 26

27 Summary A changing proposition for changing times In Accumulation, destination is key. (CIP) In Decumulation, journey is key. (CRP) Select a sustainable retirement income strategy, the power of the blend: Guaranteed Income to cover the income essentials Income top up via: > Natural Income to allow growth potential > Low volatility strategy for unit encashment 27

28 Learning objectives Common strategies determining how best to generate income at retirement Sustainable withdrawal rates and the key challenges associated: longevity, inflation and pound cost ravaging The practical application of investment strategies to generate income at retirement 28

29 Important Information Past performance is not a guide to future performance. The value of investments can both fall and rise. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed. For Professional Clients only. This is a financial promotion and is not investment advice. For a full list of risks applicable to these funds, please refer to the Prospectus. Investors should read the Prospectus and KIID for each fund in which they want to invest. Go to Investments should not be regarded as short-term and should normally be held for at least five years. The Funds are sub-funds of BNY Mellon Investment Funds, an open-ended investment company with variable capital (ICVC) with limited liability between sub-funds. Incorporated in England and Wales: registered number IC27. The Authorised Corporate Director (ACD) is BNY Mellon Fund Managers Limited (BNY MFM), incorporated in England and Wales: No Registered address: BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Authorised and regulated by the Financial Conduct Authority. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. Issued in the UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No Authorised and regulated by the Financial Conduct Authority. PRE00306, exp 31/8/