12th October 2018

Investing for Decumulation

By Henry Cobbe, CFA
Henry Cobbe is Head of Copia Capital Management which launched the Retirement Income range of decumulation portfolios in February 2017

The combination of Pensions freedom that came with legislation and high pension transfer values that came with low interest rates has triggered a surge in client taking back control of their pensions from insurers and scheme trustees.

In this article, we look at the importance of advice in retirement, the contrasting risks in accumulation and decumulation, the nature of the retirement challenge, and the differentiated approach for decumulation investing and the importance of withdrawal rates.

Advice matters most in retirement

For clients with more than £50,000 in pension assets, the vast majority are sensibly taking financial advice. Sensible not only because pensions are – unfortunately – necessarily complex, but also because advice in retirement is when advice matters most. Pot size is at its greatest. And the risk of poor outcomes is at its most acute. In the absence of contributions, Advisers can add most value by ensuring the asset allocation (risk profile), time horizon and withdrawal rate are appropriate for the client and review this each year.

Contrasting risks in accumulation and decumulation

Accumulation is the stage of the investor lifecycle when investors convert their regular (pre-retirement) income into a pot of capital. Decumulation is the stage of the lifecycle when investors convert their pot of capital into a regular (retirement) income.

The key risk in accumulation is inflation. A cash portfolio in accumulation delivers a poor outcome as returns on cash can’t keep pace with inflation. Taking risk – the “price” of return is necessary and required to achieve an above inflation return.

The key risk in retirement is the outcome risk of not having enough retirement income to maintain a desired standard of living. On DWP numbers, the target “income replacement ratio” – the ratio of post-retirement income to pre-retirement income – for average earners should be around 67%.

The retirement challenge

So, how do we solve the retirement challenge with decumulation investing – namely to make sure a pot of money can fund future expenditures, planned legacies and last the course?

This challenge is made harder because investors in decumulation are deprived of one of the most powerful tools available in accumulation: top ups.

In accumulation top ups – regular or irregular contributions from disposable income, tax relief or employer contributions mean that poor investment returns are diluted with fresh capital, and market downturns can be celebrated as buying opportunities. Of course investment returns and time horizon also have a key role to play in determining outcomes. Put differently, when your phone is charging from the mains that steady stream of energy means you don’t have to worry about usage.

In decumulation, regular withdrawals to fund a retirement income create an inverted set of challenges. The three key variables of investment outcome are pot size, withdrawal rate and time horizon. With your phone now unplugged there’s a trade-off between how much you charg it, how much you use it and battery life.

So if the key question in accumulation is “how do I maximise risk-adjusted returns on capital and contributions for a given level of risk and time horizon?”, the key question in decumulation is “how do I make sure my capital can adequately fund future expected expenditures over time?”.

The difference between these questions impacts how investment managers should design and manage portfolios.

Decumulation investing— a differentiated approach

In accumulation, the investment approach taken is known as “asset-optimised”. This means focusing on risk and return. That’s how most discretionary and advisory portfolios are managed today. So far, so familiar.

In decumulation, the investment approach that should be taken is known as “liability-relative”. This means making sure your assets move in tandem to match expected future liabilities by focusing on discount rates (yield curve) and time horizon (term).

Liability-relative investing is not new. It’s the standard approach for managing DB pension schemes where future liabilities are known and contractual. For individual pension portfolios, this liability-relative approach is similar, but future liabilities are unknown and non-contractual.

Just like a pension scheme, every client has their personal “surplus” or “deficit”. They are either able to fund or not able to fund their future retirement income. In the absence of top ups/contributions, the focus is then on withdrawal rates (over which there is a high degree of control), risk profile (over which there is some control), and time horizon (over which there is no control).

What’s the right withdrawal rate?

The 4% rule is based on a 65 year old US male with average life expectancy invested 60/40 in the US equity and bond markets. If that’s your client – then the 4% rule holds true. In the real world, withdrawal rates are a function of 1) asset allocation (risk profile) 2) time horizon and 3) confidence level. The longer your time horizon, the less you can afford to take out. The more risky your portfolio, the less you can afford to take out safely. The higher degree of confidence you want that you won’t run out of money, the less you can afford to take out. So there’s not one withdrawal rate. There are hundreds. And selecting the one that’s right for your client based on asset allocation, time horizon and confidence level is the only “risk profile” that counts in decumulation investing.


By working with their clients to manage decumulation, Advisers are helping their clients make the most of their retirement portfolios. This means Advisers need to match planning goals with the key decumulation variables – pot size, withdrawal rates and time horizon. Importantly, all these variables may change each year, so an annual review is the best approach to help clients chart the course of their decumulation journey.


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    Copia Capital Management

    Hamilton House, 1 Temple Avenue, London, EC4Y 0HA

    Understanding the risks

    This information is intended for professional financial advisers only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such. Model investment portfolios may not be suitable for everyone. The value of funds can increase and decrease, past performance and historical data cannot guarantee future success. Investors may get back less than they originally invested.

    Copia Capital Management is a trading name of Novia Financial Plc. Novia Financial Plc is a limited company registered in England & Wales. Register Number: 06467886. Registered office: Cambridge House, Henry St, Bath, Somerset BA1 1JS. Novia Financial Plc is authorised and regulated by the Financial Conduct Authority. Register Number: 481600.

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