No-one likes to talk about the worst happening, but it’s crucial where the ‘ownership’ of wealth is largely held in wrappers that can only be controlled by just one of the couple.
Pensions, as opposed to say, GIAs which can be relatively easily rebalanced and transferred, if necessary or desirable.
A case study in risk and capacity for loss
Consider the situation of a man with almost all his investment wealth in his DC pension, with a slightly younger wife who has effectively only a state pension to depend on.
Until he dies, she has no ownership rights over his pension.
Let us imagine her anxiety about being provided for in later life is rather high and her risk aversion level means that the idea of investing does not sit comfortably with her.
In your discussions, her fixation is on her familiarity with cash in the bank and the importance of “safety first”.
In the general course of events the financial modelling for a retirement funded by drawdown will account for the realistic possibility of the younger spouse living well beyond her older partner.
And a balance will have been struck between the opportunity for growth in the DC pension portfolio from equities against the attraction of certainty from bonds.
The result is often a balanced portfolio. But that might not sit comfortably, and portfolio risk keeps coming up as a problem.
Managing risk
Risk profiling tools may not be very helpful here as they are not designed for couples.
One of the ways through this situation can be to look at the options around partial annuitisation on the basis that the contract is on a joint life basis. This has several impacts.
First, it addresses the question; what about me?
There is near absolute certainty that there will be additional income for the more nervous investor for as long as they may live.
This certainty may be enough to steady the emotional ship.
Second, partial annuitisation can be viewed as an allocation of capital to bonds, but manifested as a lifetime’s income guaranteed.
Annuity ownership underpins capacity for loss and can allow residual pension capital to seek higher returns by taking a higher weighted exposure to equities.
This may better satisfy the more adventurous investor who may also feel more proprietorial about capital and keen to invest up to the limit of his risk tolerance.
