What's so good about Nurses?
One of the greatest challenges of Drawdown is the reliance on equities to achieve the critical yield. Exposure to equities is essential to the long term success of Income Drawdown but as many people are finding out as they reach their tri annual review, falls in the stock market affects your ability to take income.
The traditional way of balancing the needs of growth and income has been the use of the Barbell portfolio approach.
“….The most efficient way is to provide equity exposure through growth stocks but with a small percentage of the total being held in very high yield fixed income stock or equivalent securities. This is an attractive proposition for pension fund withdrawal strategies, when one considers the requirement for long term growth prospects whilst balancing the obligation for an ongoing income stream.” (J.Porteous,2002.K20 Pension investment options)
This can be achieved through a Guaranteed Equity Bond. Although there is no guarantee the markets will rise at least there is the guarantee that the value of the investment will not fall while the portfolio will have the equity exposure it requires.
Setting the portfolio up
By incorporating the GEB into a Barbell approach the portfolio becomes simple for the client to understand and the adviser to construct. The portfolio is split into short, medium and long term components.
Short term
– This part will constitute 1 – 2 years income and will be invested in cash.Medium term
– This part requires enough of the fund so that this component and the short term component are sufficiently large to provide the balance of the first 6 years income. One might look to collective investments investing in asset classes such as Gilts, Corporate Bonds and Property (Bricks & Mortar fund) for this component of the fund.Long term –
This part could be wholly invested in the GEB. The portfolio will be exposed to equity growth but will protected from fluctuations in the market. Such falls have often resulted in a reduction of the client's income at the triennial review.The result is a low risk portfolio providing income and peace of mind to client and adviser alike.