Mention “pension” in a now slowly re-opening pub and you can be reasonably certain some of the hardy souls who have ventured back to the public bar will quickly drain their glass and make their excuses.

Such is the fate of those of us who have spent our working lives in financial management (not the pub) but you also see the converse.

Clients, friends and contacts who have financial issues which need solving suddenly remember you have spent decades honing your specialist skills.

So it is with the latest catchy financial management phrase. Centralised Investment Proposition (CIP). No, don’t look at your watch. The name on the wrapper has clearly never crossed the desk of our colleagues in marketing but is all the better for it.

It’s a wealth management concept that’s come of age during the pandemic. Typically, it’s an approach aimed at supporting clients continuing to accumulate wealth.

For most, this will mean continuing to keep capital invested while pocketing the gains made by virtue of those investments.

Part of the risk they face is the time and manner in which they take those gains to provide an income that is sustainable. A number of factors, i.e. ,investment volatility, where funds fluctuate in value, going up and down*, interest rates, charges or even demand (there may be a queue in front of you of people waiting for their money) can make the process more costly, although it’s tempting to see it in these online, instant times as magically appearing money.

In the jargon, this is sequencing risk: taking an income from an investment at a time when it’s not sensible to do so.

One strategy is to draw only natural income. Whilst protecting the principal, this method does not provide clients with certainty of income and can compel firms to recommend funds that may skew asset allocations.  These may not be appropriate given market conditions ie it’s hard to predict how things will look next week, let alone months or years away.

Another can be to use secure income within a drawdown pot, which offers clients a high degree of security. This means buying an annuity with some of the money whilst leaving the rest invested in the pot. However, with annuity rates at historically very low levels this approach can be expensive.

Even in pensions, things rarely stand still and the advent of freedom and choice six years ago saw CIP taken as the model for what’s known as Centralised Retirement Proposition or CRP.

As many more folk were able to access their pensions earlier, many of them attracted to the same method of keeping capital invested while drawing down the gains. Which brings with it the same sequencing risk I touched on above.

Our approach is to recognise the character of this risk. We have always advocated a range of “buckets” to guard against the impact of this reality.

So for people wanting money today, there are buckets with little risk attached, which are regularly topped up with cash from those buckets which are designed for tomorrow, the next day or a bit further away.

The pandemic was a testing time across the financial services spectrum but the effect on our CIP clients suggested it wasn’t the worst place to be as the “little risk” (weren’t they a girl group?) buckets were relatively unaffected while the longer-term pots further down the line captured the market’s recovery.

Nor did I see a change in how clients viewed risk during this period as they had been established in a strategy that mirrored their expectation.

Or, looked at another way, I wasn’t left alone at my table when I laid out how such an approach can be a clear proposition to help you live your life and protect and grow your capital.

The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. You should be aware that past performance is no guarantee of future performance.

Posted by Phil Casey

Topics: Insights & Advice, financial planning

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