Smoothing the way?
A smoothed fund can be beneficial for clients nearing retirement who want growth but are made nervous by market ups and downs.
These funds offer the potential for returns similar to those achievable with diversified, multi-asset funds but where impact of shorter-term market movements is smoothed out, removing a significant source of anxiety.
This allows risk-averse clients to participate in long-term market growth without the extremes of daily volatility, reducing the likelihood of making rash decisions that could derail well-crafted investment plans.
Smoothed funds also offer transparency when it comes to policy valuations, without the opaque nature of with-profits bonuses. This means that, if a client needs to access their money before they had originally expected, they will not suffer from potential penalties or the loss of expected – albeit unknown – bonuses.
Furthermore, smoothed funds are designed to provide more predictable outcomes, which can be particularly appealing to those nearing retirement who are concerned about the impact of market volatility on their savings.
Smoothed funds could also be considered for clients in need of a blended investment solution that targets income and growth.
For those in the run-up to retirement, a partial allocation to a smoothed fund could provide a degree of defence in the event of a sharp market downturn, without sacrificing the potential for long-term growth.
This combination of stability and growth potential makes smoothed funds an attractive option for a wide range of investors, particularly those who are looking for a way to manage risk while still pursuing their financial goals.
Planning for income today, tomorrow and in the longer-term
For clients who remain invested in retirement, there is a risk that early withdrawals might coincide with a sharp market downturn. Smoothing can help by providing more stability in the fund value while the client takes an income, offering a buffer against the potential erosion of capital during periods of volatility.
Many advisers now use the bucket approach alongside various strategies to address client income needs in retirement. This involves placing retirement assets into three separate buckets: today, tomorrow, and future.
Investments in each bucket involve different levels of risk, depending on the client’s appetite for it, behavioural capacity, timeframe, and need for money.
The bucket approach can help reduce the risk that arises from the time that income is withdrawn, as the 'today' bucket is likely to hold lower-risk, more liquid holdings designed to meet immediate income needs without requiring withdrawals from capital market-backed investments during a downturn.
In contrast, assets in the 'future' bucket have a longer timeframe to recover if they drop in value, which allows it to typically carry more market risk, with a focus on long-term growth.
