Planning for sequence of returns therefore depends on how one is accessing income.
Claire Trott, divisional director for retirement and holistic planning at St James’s Place, says if an individual is annuitising then there is nothing to consider, but the use of drawdown gives many more considerations.
She stresses that the most important thing to consider is how much to draw out, which should be kept to a minimum as there is no point in taking income and/or tax-free cash out for it just to sit in a bank account.
Trott adds: “Many providers have flexible options to draw tax-free cash monthly and some taxable income. This means that you can meet the income needed by divesting less.
"If you do need the income then there isn’t a lot that can be done but using tax-free cash to provide income is a very good way to avoid a large up-front divestment and remove some of the sequencing risk."
Inflation influence
With high inflation likely to remain longer than expected, it is important to understand how it affects retirement income planning.
While most commentators say inflation will return to lower levels, there is considerable variance about when and to what eventual level.
In the Financial Conduct Authority's retirement outcomes review, the regulator expressed concern over the number of investors with drawdown plans wholly invested in cash, which is unlikely to match the returns available from higher risk assets.
Tait says: “Cash is more vulnerable to the impact of inflation than any other asset class and one of the biggest impacts an adviser can make on a client’s future is demonstrating how investing in equities, in particular, can offset this danger.”
Toni Sheen, business development director at Pi Financial Dixon Sutcliffe & Co, adds: “When inflation increases it means higher prices on goods and services, which basically results in a loss of purchasing power of money – cash being an obvious asset to lose out.
"Commodities and inflation indexed bonds tend to do well when inflation is high. It is however important to diversify to ensure you are getting the best possible returns.”
The FCA in January also launched a thematic review into retirement income advice, which will review the level of advice consumers are receiving from IFAs on meeting their income needs in retirement and how firms are responding to changing consumer needs as a result of the rising cost of living.
The regulator will publish a report setting out its findings at the end of this year. The review comes after the City watchdog said it was focusing on retirement income strategies following its work on defined benefit pension transfers in recent years.
