Pension freedoms four years on: how the new rules have changed the way we invest

George Osborne introduced 2015's pension reforms and investors today face a wider range of choices - and solutions

08 Feb 2019

Nick Georgiadis

Nick Georgiadis

Head of DFM Team

The retirement landscape has seen fundamental changes in recent years. This has required a shift not only in the way individual wealth is structured, but also a change in the underlying investment approach.

The path for investors used to be clear. They would hold a balance of equities and bonds appropriate to their age and risk appetite and as retirement approached they would progressively shift into government bonds in preparation for buying an annuity. Four years on from the changes that liberated pension planning, removing the compulsion to buy an annuity and changing the inheritance tax rules, we see that today’s retirees have different considerations.

The first is whether they should be using their pension pot at all. With the removal of the 55% tax rate on inherited pension pots, it can be tax efficient to pass these assets to the next generation. Where possible, it might make more sense to use other assets – such as Isas or rental income – to generate income in retirement and preserve the pension pot for as long as possible.

Retirees today are also more likely to be in drawdown rather than buying an annuity. This means a client’s income is no longer guaranteed and advisers need to find an alternative approach to delivering a sustainable income in retirement. It also means that that clients are more vulnerable to the ravages of inflation – their income has no automatic inflation-linking, as is often available on annuities. The need to deliver inflation-adjusted income and preserve the real value of the capital can be a tricky balancing act.

At the same time, fluctuations in capital can become more damaging, particularly at certain points in retirement. If there is a sudden fall in the value of the pension pot as a result of stock market volatility early in retirement, it’s ability to provide the required income falls. It may be necessary to take more from capital to sustain the same level of income, resulting in a spiral of ‘pound cost ravaging’. The new parameters around retirement pots need to be considered alongside longevity considerations. Average longevity continues to edge higher, meaning pension pots have to last for longer.

The changes influence the right way to take risk in portfolios before and after retirement. Whether the retiree wants to move into drawdown or leave their pension pot untouched to call on other assets, it is no longer appropriate to be in super-safe assets for the duration of retirement. A portfolio of government bonds and cash won’t grow enough to beat inflation over the long term. This is particularly true at the moment when the yield on a 10-year gilt sits at around 1% below inflation ( (

We don’t see this changing in the short-term. Although the tide has turned on interest rates in the US, making treasury and cash yields more attractive, for other developed markets yields remain unattractively low. Investors still have to take risk – via equities, corporate bonds and other asset classes – to sustain growth ahead of inflation.

However, while investors shouldn’t be taking too little risk, they can’t take too much either. Variability of capital can threaten the income stream on which retirees rely. This is a particular problem while income-generative assets – such as bonds or certain higher income equities – are expensive. Income is much more difficult to achieve and pursuing it too doggedly by moving into higher risk or expensive asset classes may be to the detriment of total return.

The emphasis has to be on total return as a result. If avoidable, income cannot come at the expense of capital. Steadily growing clients’ capital is likely to be more appropriate for most retiree portfolios even if this means holding a higher weighting in cash to maintain a regular income.

At the same time incorporating a range of assets is vital. It is easy to neglect this when bond and equity markets have performed so well over the past decade. However, the environment is changing, central bank support for financial markets is diminishing. With this in mind, a multi-asset approach, skewed to capital appreciation is the base option for our retirement portfolios. These will incorporate a range of assets beyond equities and bonds, some of which are effective at dampening volatility or balancing other risks,.

We have seen more and more clients changing the way they run their pension portfolios and planning for it earlier. This might include balancing investment across Isas, pensions and other assets in the accumulation phase. It means managing the assets within a pension fund so that income can be readily turned off and on as and when it is needed. It is a fundamental change in the way we think about pensions. It brings the management of pension asset more in line with other parts of an investor’s portfolio. Rather than being wrapper-specific, our investment approach is now client and market specific


Nick Georgiadis

Nick Georgiadis

Head of DFM Team

Nick joined in 1981 and heads the team which specialises in providing investment advice to clients of Independent Financial Advisers. He is also a Portfolio Director with responsibility for managing a client base largely introduced by advisers. He holds the Securities & Investment Institute Diploma.


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