AJ Bell today launches an innovative retirement income solution to help financial advisers manage clients taking income in retirement. The AJ Bell Retirement Portfolio Service will be relevant for any clients requiring a sustainable income in later life and is available via SIPP, ISA or general investment account. It will be particularly attractive to those drawing an income under the pension freedoms.
The new service offers advisers a fully managed Centralised Retirement Proposition and is available, free of charge, via the AJ Bell Investcentre platform. Designed in conjunction with advisers from around the UK, the service combines four strategies designed to prolong the longevity of portfolios in decumulation, whilst minimising sequencing risk.
Sequencing risk can have an extremely detrimental impact on a portfolio if investments are sold at a loss. If investments are sold after a fall in value, the remaining funds need to work harder to make that loss up. This can be particularly damaging if those losses occur in the early years of retirement and can impair the longevity of the pension pot.
How the AJ Bell Retirement Portfolio Service works
The 4% rule
To promote portfolio longevity, the service is designed to allow advisers to promote the much used 4% rule, which works on the premise that if someone withdraws 4%* of their retirement fund value in the first year and then adjusts subsequent withdrawals for inflation, they should avoid running out of money for 30 years. However, the service is flexible enough to allow clients to take more or less than this amount should they choose to do so.
Three bucket allocation
The service splits the client’s investment into three buckets:
1. 45% in the AJ Bell Income and Growth fund
2. 45% in the AJ Bell Income fund
3. 10% in cash
The AJ Bell funds are widely diversified multi-asset funds investing in passive ETFs and active funds. Both target an annual yield of 4%**, with the AJ Bell Income fund aiming to preserve capital by investing in a mix of mainly shares and bonds and the AJ Bell Income and Growth fund aiming to grow capital by investing in a higher risk portfolio consisting predominantly of shares.
Cash buffer
The cash bucket is used to meet the client’s income requirements as agreed with their financial adviser. The annual 4% yield** produced by the two funds is paid into the cash account, replenishing it over time and reducing the need to sell down investments at the wrong time. The acts as a natural defence against sequencing risk.
Smart rebalancing
A further protection against sequencing risk comes via AJ Bell’s smart rebalancing approach which banks profits along the way. As retirement lasts a long time, the underlying investments will experience periods of strong gains and periods in which investment values fall. Smart rebalancing ensures the need to sell after a market fall is reduced by selling investments only after gains have been banked.
If a client’s income requirements are more or less than the natural yield of 4% targeted by the funds**, the cash bucket will fall below or rise above the initial 10% allocation. Cash balances over 10% are reinvested back into market, whilst if cash falls below 4%, the portfolio resets back to the initial three bucket allocation.
Charges
There is no explicit fee for the service, with AJ Bell receiving its normal management fee on the underlying investments. AJ Bell’s annual management charge for both the funds is 0.15% with the ongoing charges figure capped at 1%. AJ Bell’s normal platform charge will apply to the fund holdings, scaling down from a maximum of 0.2% depending on portfolio size. AJ Bell’s platform charge is not applied to the cash reserve.
Kevin Doran, chief investment officer at AJ Bell, comments:
“Given the popularity of the pension freedoms there is a real need for products and services that help advisers deliver an effective retirement proposition. With income drawdown now the most popular retirement income option, advisers and their clients are having to get to grips with managing portfolios in the withdrawal phase and the specific challenge of sequencing risk.
“Our new Retirement Portfolio Service has been designed as a ready-made solution that enables advisers and their clients to focus on their income needs, without having to worry about the running of the underlying portfolio. The cash bucket will ensure they don’t have to sell investments at the wrong time and the yield generated by our two income funds should be able to support a sensible withdrawal strategy over the long term.”
How the AJ Bell Retirement Portfolio Service works
*4% of the initial monies invested, increasing in line with our future inflation expectations of 2% p.a.
** The 4% target yield from the AJ Bell funds is not guaranteed and can fluctuate.