Guest Matthew Yeates of 7IM explains what the Retirement Income Service is and how it benefits clients.
PM: If you were to explain what RIS (the Retirement Income Service) is trying to achieve to a customer, how would you succinctly put that across?
MY: I would say, RIS is the way that we go about providing people with income in retirement. It’s the way we structure portfolios differently; not just for meeting a long-term savings goal, but for meeting a goal that’s providing income through time.
If you look at the options out there, there are plenty, but we approach it in a specific way. If a client comes to us with an income need in retirement, the RIS is the framework we use to take off-the-shelf solutions, and the process we give to them to help them achieve that goal through time.
PM: So, how does it actually work? How is it structured? Say someone comes to you with X amount of money and they want Y per year. What’s the process from that point of setting things up for them?
MY: The way I like to think about it is the way I described earlier – why investing in retirement is a bit different. It’s because, if you imagine the process for saving for a long-term goal, you might go through a risk-profile exercise. You might then go to a firm for them to help you invest in their multi-asset fund.
At the first stage, what we do is take in a little bit more information than that. We take in an income requirement, a risk profile and the amount of time it needs to last. Then, off the shelf, we would have a way to approach that. That will essentially be something similar to picking off the shelf a single fund, model portfolio or portfolio for that client, but what we’ll do is combine several of them in a very specific way.
There are three key steps. The first is, taking in that income requirement, how long it needs to last and how much risk the client is willing to take. Then, it’s saying, ‘If you want to take 3% a year and you have a balanced risk profile to last 25 years, that means you’re on track.’
The second thing we do, rather than just taking all the money someone gives us and investing it in one product, we split it into short, medium and long-term pots. We have some cash on deposit to provide the income through time; we have a pot with a lower risk with a buffer, and then we have some longer-term growth assets.
We’ve taken in the income requirement and how much risk people feel comfortable with, we’ve played back how likely they are to reach that go and we’ve also given them a mix of products.
By doing so, if we have short-term periods of volatility, we don’t necessarily have to be drawing money out of at the same time, because we have the buffer. Importantly, the way that the last step works is that we have a strict set of rules about how that portfolio is going to be balanced through time in order to pay that income.
So, we play back how likely those goals are to be successful as a default, we mix things in a set of buckets to provide a buffer, which means that you don’t have to eat into your investments even if markets go down in the short-term. And then we have a designed set of rules we follow in-house to define how that cash will be created, even in a market downturn.
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