DECUMULATION
How Nedbank Private Wealth helps clients draw down their wealth
How you use investments, pensions and savings to fund your lifestyle, right to the end, is a complex question that can only be addressed with joined up wealth planning and investment advice.
You probably have a vision of how your life will evolve. You may be planning to retire to spend more time with family and friends. You may want to travel, or develop new interests you have not had time to try. Or, it may be that you want to continue to work for as long as possible, or transition to a second career as a consultant or take up a role on a company board. Whatever your preference, you want to be rewarded for your hard work and to stay mentally and physically healthy. You may also want the opportunity to gift money to family or support charitable causes. Regardless of your plans, at some point you will no longer focus on growing and accumulating your wealth. Instead, you will increasingly rely on your investments, pensions and savings (i.e. your liquid assets) to fully provide for, or to supplement, your expenditure needs. This period of your life is known as decumulation or drawdown. It is also a period where there are new risks you need to be aware of. This is why we focus on a comprehensive approach that encompasses all of your liquid assets through a wealth plan, which includes a detailed, personal decumulation profile. Given this is a crucial stage of your life, we listen to what’s important to you, seek to appreciate your goals and objectives over the short, medium and long term, and help to anticipate future hurdles. By taking the time, we create the right plan for you and your family.
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THE IMPORTANCE OF PLANNING As you pass the midpoint in your life, there are fewer opportunities to start afresh. This is when you begin to focus on how best to draw down on your existing assets to meet your future expenditure needs, and ensure your withdrawals are sustainable for the rest of your life. You start by thinking about your financial goals and spending requirements in the years to come. The level and timing of your activities in retirement, which will change over time, help to profile the ‘shape’ of your future expenditure. Your financial goals and spending needs, together with information on your investments, pensions and savings, helps us set-up your future cashflow plan. It is vital this plan includes your essential outgoings (e.g. funding your lifestyle), as well as any discretionary expenditure, which includes one-offs (e.g. helping your children onto the property ladder and travelling to destinations you always wanted to visit). You should also think about legacy planning, or donations to charitable causes close to your heart. It is also important to have a sufficient capital buffer to help you through any unexpected events or if things go wrong. An example is given below, but your goals are unique to you. For example, you may spend more early in retirement, only to then see life quieten down. Later on, you may need to fund long-term healthcare.
WHAT WILL YOUR PROFILE LOOK LIKE?
Annual expenditure (£)
Enjoy Spending
Simpler Lifestyle
Supported Living
Aged care Helping children with mortgages
Dream holidays
55
65
Adapt/renovate home
75
Increasing healthcare costs
85
95 years old
Your cashflow plan also builds in an expectation of future inflation levels and the impact on your spending, and extrapolates any forthcoming investment gains from liquid assets.
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We will discuss your plans with you — especially if these need to be prioritised — and it may help to picture the hierarchy of retirement spending as a pyramid, as in the diagram below. HIERARCHY OF RETIREMENT SPENDING
LUXURY ONE-OFF OUTLAYS
GIFTING TO FAMILY/ LEAVING A LEGACY
DISCRETIONARY EXPENDITURE
EMERGENCY FUND
PRINCIPAL COSTS OF LIVING
IMMEDIATE CONCERNS AND PROVISIONS
By creating a visual representation of your anticipated spending in retirement, as well as putting together a detailed overview of your expenditure in a cashflow plan, we can then develop your broader wealth plan. Your wealth plan brings together your plans for retirement, and assesses the probability of success — i.e. how likely you are to achieve your goals. When drawing up your wealth plan, we will also ensure you have all the right documents, such as a last will and testament, or a lasting power of attorney. We may also have a conversation about the use of insurance, which can play an important role in hedging against future financial obligations. Regular reviews of your wealth plan help ensure that it is flexible and can adapt as your life changes. And the reviews allow you to remain confident that the approach being taken receives the due care and attention it deserves, to support you over the coming decades. We will help you implement your wealth plan and to intelligently structure your finances.
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INTELLIGENT WEALTH STRUCTURING Wealth structuring involves the use of the tax allowances, exemptions and reliefs available to you. We also make use of some of the tax-efficient investment vehicles available to you, such as ISAs and pensions if you are based in the UK, and consider the suitability of structures, such as offshore bonds, family investment companies and, where appropriate, trusts. It is important that you withdraw funds from your investments in a particular order, which generally means withdrawing from the least tax-efficient investments first. This allows your investments to continue to compound – a concept Einstein noted as the eighth wonder of the world – and reduces your tax ‘drag’, i.e. the reduction in investment returns directly attributable to taxes you have paid. Depending on your circumstances, your pension may actually be the last pot you should draw from, especially if you are in the UK. This is because it is one of the most tax-efficient investment structures and can currently be passed to the next generation without incurring inheritance tax. As taxation rules change – usually due to government intervention – we regularly evaluate and update your wealth plan accordingly. We offer an actively managed investment service and can recommend a suitable strategy for you.
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SPECIFIC RISKS LINKED TO DECUMULATION
As you accumulate wealth over your working life, it is normal to consider investment risk, which is actually a ‘basket’ of risks, such as credit risk, liquidity risk and market risk. As an experienced wealth manager, we seek to mitigate these risks on behalf of our clients through our investment process. However, although investment risk continues to be important in decumulation, as you become increasingly reliant on your liquid assets to fund your expenditure for the rest of your life, you become exposed to additional risks. These include: 1.
INFLATION RISK This is a major risk faced in retirement – which may last 40 years or more – when you primarily rely on your liquid assets. Sometimes referred to as ‘the thief that keeps on taking’, inflation erodes the real value of money and, therefore, it is important that your investment strategy in decumulation is designed to produce a return in excess of inflation. It is vital that you appreciate how your level of spending today can be extrapolated into the future – again taking inflation into account – and what impact these calculations might have on your standard of living. And although measures of inflation are regularly published, it’s important to realise your spending is not necessarily aligned to the basket of goods and services used by governments to publish their national consumer price indexes. Instead, you need to consider your own personal level of inflation, which may be higher.
2. LONGEVITY RISK While we are generally living for longer, the benefits of a longer, healthier life come with the real risk of outliving your wealth. As people live progressively longer, this risk becomes more of a danger, which is difficult to pin down as life expectancy doesn’t stand still. The amount you withdraw from your liquid assets has to be sustainable throughout your lifetime. You need to ensure you do not withdraw too much capital as this harms your ability to withdraw funds in the future and lowers the level of capital on which investment returns can be achieved. 3. SEQUENCING RISK This is a complex risk associated with poor investment returns in the early years of drawing down from your investments. It means if you experience losses in your investment portfolio due to market declines during the first few years of retirement, when combined with continual withdrawals, it can be very difficult to recoup those losses. And while negative market returns may affect you at any point in retirement, losses in the early years have a disproportionate effect on your overall outcome, even if the long-term average returns for the entire retirement period appear sufficient. Sequencing risk is often confused with volatility, which is a distinctly different risk. Two portfolios with exactly the same long-term volatility, but a different sequence of returns, can have dramatically different outcomes.
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BALANCING LONGEVITY AND SEQUENCING RISK The solution to longevity risk is to select investments that aim to provide attractive potential returns and maintain a level of wealth that will sustain you throughout your entire retirement. Meanwhile, you typically mitigate sequencing risk by seeking stable, low or lower-risk investments to avoid a level of loss that could permanently impair your portfolio. The challenge for investors is to build a portfolio that balances these competing needs.
LONGEVITY RISK
SEQUENCING RISK
The risk of outliving your assets
The risk of early, significant negative returns
Problem:
Your standard of living may be materially lower
Significant portfolio losses may be unrecoverable
Solution:
Higher returns
Lower risk
Definition:
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RETIREMENT PORTFOLIO SERVICE We offer a sophisticated, risk-controlled investment management service designed to achieve the outcomes you require and to meet your financial goals throughout your retirement. We create mixed-asset, multi-manager portfolios — and seek to invest globally with active currency management. Where appropriate, we may introduce our ‘dual portfolio’ approach. This involves creating two separate portfolios which, when combined, reflect your overall risk profile. The lower-risk portfolio — from which withdrawals to cover expenditure are made — has a bias towards cash and bonds, and is less likely to suffer a severe drop in value, helping to reduce the potential impact of sequencing risk. Meanwhile, the higher-risk portfolio, with a bias towards equities, should deliver a greater opportunity for growth and protect your overall wealth from the ravages of inflation and longevity risks.
SHORT TO MEDIUMTERM PORTFOLIO
LONG-TERM PORTFOLIO
The longer-term investments are invested in a diversified portfolio of higher-risk assets, aiming for growth, which seeks to mitigate the effects of inflation.
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Uses a conservative mix of assets, favouring cash and bonds over riskier assets to cover your expenditure for up to seven years, reducing sequencing risk.
We continually monitor both portfolios and regularly rebalance them — transferring assets from the higher risk to the lower risk portfolio to maintain your overall risk profile over time. We would expect to rebalance typically no sooner than seven years after implementation. As a result of this rebalancing, each client will have their own unique ‘journey’ specific to their circumstances. For clients with a very low or very high risk tolerance, a single portfolio approach is likely to be more suitable. In this instance, withdrawals are made from the single portfolio, which is rebalanced to maintain the correct asset allocation throughout its lifetime. Our retirement portfolio service, whether single or dual portfolio, is designed to allow you to enjoy life, having delegated investment management decisions to us. We actively manage the long-term strategic asset allocation, and the shorter-term tactical allocation, which enables the use of specific investments at different points in the economic cycle. For example, when inflation is a threat, real asset investment trusts typically provide some inflation proofing. We will regularly review your wealth plan with you, including an evaluation of whether your existing investment portfolio is likely to meet your future expenditure needs. If not, we will work with you to make adjustments as needed. We will of course take into account the investment risk you can afford to take – i.e. your capacity for loss – as well as understanding the level of risk you are comfortable with. A third aspect to consider is what level of risk you need to take in order to achieve your goals.
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DECUMULATION: THE SOLUTION Given the complexities and risks we have detailed, we believe a comprehensive service is required that joins up wealth planning and investment advice to meet all your wealth needs throughout retirement.
ANALYSE YOUR EXPENDITURE NEEDS IN RETIREMENT By understanding your essential and discretionary spending, and anticipating when life may be more active (and more expensive), we can help to ensure all your future expenditure requirements can be met.
IDENTIFY ADDITIONAL GOALS As well as your expenditure needs and goals, we also seek to include any ‘dream’ expenditure you have in mind, along with support you may want to provide for your children, and establish any gifts to charitable causes and legacy planning. ASSESS THE SUSTAINABILITY OF WITHDRAWALS By calculating the sum of the future withdrawals, taking into account the impact of inflation over the anticipated time horizon, we build your personal cashflow plan with the core objective of ensuring your expenditure needs can be met throughout retirement. AGREE A TAX-EFFICIENT DECUMULATION STRATEGY We establish a tax-efficient strategy and an order of withdrawals from your various investment structures, such as general investment accounts, ISAs and pensions, while making use of the available tax allowances and reliefs. We can also consider the suitability of other investment and wealth structures, such as family investment companies, foundations, offshore bonds and trusts. CONFIRM THE INVESTMENT STRATEGY We create and establish an investment strategy, working within the various investment structures, specific to your risk profile. Where necessary, we may also introduce a dual portfolio approach. RECEIVE ONGOING REVIEWS, COACHING AND GUIDANCE We review your plan every year, updating it as needed following an informed discussion on your circumstances, goals and objectives. In addition, you may appreciate the opportunity to seek an informed opinion about the options available to you, as well as our technical support, when prioritising wealth goals or any changing behaviours to help you achieve more financially.
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SUMMARY If you are approaching the time to retire, are about to retire, or have already retired, it is important to review your wealth plan to ensure it addresses the decumulation issues we have highlighted. We can also help with conversations about money that may affect your finances in the future, e.g. how and when to gift or lend money to the next generation(s). Because we’re boutique, but also part of a larger financial services group, we believe we offer the best of both worlds — long-term financial security and a balance sheet to support you, as well as the ability to be flexible and responsive in terms of our support. We deliver fantastic service, keeping an eye on costs, whether your affairs are UK-focused or extend internationally, whether you are starting to invest or investing for the next generations of your family. Our awards validate our commitment to clients. It simply starts with a conversation. Until you choose to become a client, there are no commitments or charges.
DECUMULATION PLANNING
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Managing your wealth ahead of and during your later years and helping you maintain your standard of living. Seeking to help the next generations of your family through lifetime gifting or leaving a legacy.
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Cashflow planning Active investment management Access to specialised advice through one point of contact Wealth structuring Borrowing against UK property or investment portfolios
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GET IN TOUCH If you would like to start a conversation about your plan for life, contact our wealth planning team at wealthplanning@nedbankprivatewealth.com, or contact your local private banking team. LONDON OFFICE Nedbank Private Wealth Seventh Floor, 12 Arthur Street London EC4R 9AB United Kingdom Tel +44 (0)20 7002 3600
UAE REPRESENTATIVE OFFICE Nedbank Private Wealth Office 129/130, 1st Floor Emarat Atrium Building Sheikh Zayed Road, PO Box 214500 Dubai, UAE Tel +971 4 346 5581
JERSEY OFFICE Nedbank Private Wealth 31 The Esplanade, St Helier Jersey JE1 1FB Channel Islands Tel +44 (0)1534 887889
OTHER USEFUL CONTACT DETAILS
ISLE OF MAN OFFICE Nedbank Private Wealth St Mary’s Court, 20 Hill Street Douglas, Isle of Man IM1 1EU, British Isles Tel +44 (0)1624 645000 (UK freephone) 0800 289936
VISA CARD HOTLINE Tel +44 (0)1624 645111 This number is available 24 hours a day, seven days a week FRAUD HOTLINE Monday to Friday 8am – 8pm UK time Tel +44 (0)1624 645000 Monday to Friday 8pm – 8am UK time Weekends and UK public holidays Tel +44 (0)20 8167 3223
www.nedbankprivatewealth.com
WEALTH PLANNING | INVESTMENT MANAGEMENT | PRIVATE BANKING Not all products and services are available in all jurisdictions. Legislation or regulations in your home jurisdiction may prohibit you from becoming a client. We reserve the right to make the final determination on whether you are eligible for particular products and services, or to become a client. Please note that this material has been provided to you for information purposes only as an example of the type of services and products we are able to offer you. The provision of this material does not constitute an invitation or inducement to buy or sell an investment or service, nor does it constitute an advice or personal recommendation. The value of investments can go down as well as up, you might get back less than the total you originally invested. Changes in rates of exchange or taxation may have an effect on the value of investments. Past performance is not necessarily a guide to future performance. Nothing in this document constitutes legal, accounting or tax advice. Tax rules are subject to change and may not apply to your individual circumstances. Nedbank Private Wealth does not give tax or legal advice, and clients must consult their independent tax/legal advisers for specific advice based on their circumstances before entering into, or refraining from entering into, any investment, structure or transaction. Please refer to Section 32 of our published Terms and Conditions for details regarding your cancellation rights. Nedbank Private Wealth is a registered trade name of Nedbank Private Wealth Limited. The parent of Nedbank Private Wealth Limited is Nedbank Group Limited, which is incorporated in South Africa and is regulated by the South African Reserve Bank. The latest audited report and accounts, and details of the credit rating are available at www.nedbankprivatewealth.com. Nedbank Private Wealth Limited is licensed by the Isle of Man Financial Services Authority and is a participant in the Isle of Man Depositors’ Compensation Scheme as set out in the Compensation of Depositors Regulations 2010. For full details, please see www.iomfsa.im. Registered office: St Mary’s Court 20 Hill Street Douglas Isle of Man. The Jersey branch is regulated by the Jersey Financial Services Commission and is a participant in the Jersey Banking Depositor Compensation Scheme. See www.gov.je/dcs for full details of the Scheme and banking groups covered. The London branch is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registration No: 313189. Your eligible deposits with Nedbank Private Wealth Limited, London branch, are protected up to a total of £85,000 by the Financial Services Compensation Scheme, the UK’s deposit guarantee scheme. Any deposits you hold above the £85,000 limit are unlikely to be covered. Please ask for further information or visit www.fscs.org.uk. Nedbank Private Wealth Limited is licensed by the Financial Conduct Authority to provide regulated mortgages in the UK. The UAE representative office in Dubai is licensed by the Central Bank of UAE. Representation in South Africa is through Nedbank Limited. Registered in South Africa with Registration No 1951/000009/06, an authorised financial services and registered credit provider (NCRCP16). Nedgroup Trust is a registered trade name of Nedgroup Trust Limited and Nedgroup Trust (Jersey) Limited. Nedgroup Trust Limited is licensed by the Guernsey Financial Services Commission under the Regulation of Fiduciaries Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 to form, manage and administer trusts, companies, pension schemes and gratuity schemes. Company Registration No. 23460. Nedgroup Trust (Jersey) Limited and its affiliates are regulated by the Jersey Financial Services Commission. Nedbank Private Wealth Limited is not licensed to take deposits under the Banking Supervision (Bailiwick of Guernsey) Law, 1994 and it is not a member of the Guernsey Banking Deposit Compensation Scheme. P8d 09/21