Decumulation Portfolios: Why an Accumulation MPS Is Not Automatically Suitable

Of the retirement income advice files the FCA could assess in its thematic review, 11% raised concerns about suitability and 22% had material information gaps. The regulator reviewed 28 firms, and 45 of the assessable files, 67%, were suitable.

Those numbers are from TR24/1, and they have been quoted widely. What has been discussed much less is where the gaps actually were. Not in the cash flow software, not in the annuity-versus-drawdown comparison. In the inputs: the client’s expenditure, their liabilities, and above all their capacity for loss.

Which points at something uncomfortable. For a great many clients, the day they stopped contributing and started withdrawing, the portfolio did not change. The risk label stayed the same, the model stayed the same, the DFM stayed the same, and nothing in the file explains why that was the right answer.

The regulator’s actual point about risk

The FCA’s language is precise and worth taking literally. In its good and poor practice guidance, it states that the risk tolerance of a client in decumulation can be inherently different from when they are in accumulation.

Inherently different. Not “may have changed”. The structural position has changed, regardless of how the client answers a questionnaire.

And the review found that some firms were not assessing capacity for loss at all, which the regulator connects directly to the risk of not identifying a suitable income or investment solution. Attitude to risk on its own does not do the job here. A client can be perfectly comfortable with volatility and still have no capacity to absorb it, because they are spending the portfolio.

The practical test on a file is not whether a risk profile was run. It is whether the file demonstrates that somebody considered capacity for loss as a separate question from attitude to risk, and reached a conclusion about the portfolio on that basis.

Why the same model behaves differently

The mathematics is not complicated and it is not disputed. It is just easy to leave out of a portfolio review.

In accumulation, volatility is close to free and is arguably helpful. Contributions buy more units when prices fall. Time repairs drawdowns. The only number that matters at the end is the terminal value.

In decumulation, volatility has a price. Units sold to fund income during a fall are gone. They do not participate in the recovery. The order of returns, not just their average, determines the outcome.

	Accumulation	Decumulation
Effect of a fall	Buys cheaper units	Realises losses permanently
What matters	Average return over the period	Order of returns, especially early
Role of volatility	Tolerable, arguably useful	A direct cost
Horizon	Known and long	Unknown and shortening
Recovery mechanism	Time and further contributions	None, unless income is reduced
Primary risk	Not reaching the target	Running out, or cutting income

Two clients in the identical balanced model, with identical average returns over twenty years, can end in entirely different places if one met a bad run in years one to three. That is sequencing risk, and nothing in a risk-rated model portfolio’s mandate addresses it.

The structural problem with an MPS in decumulation

This is the part that bears directly on how most advice firms have built their centralised investment proposition.

A model portfolio service is managed to a risk mandate. The discretionary manager knows the mandate. It does not know which clients are withdrawing, at what rate, from which holdings, or whether a withdrawal is due next week. It is managing a portfolio, not a withdrawal plan.

Which means the interaction between the portfolio and the income, the single most important thing in the client’s financial life, sits with the adviser and with nobody else. That is a perfectly workable arrangement. It is a problem only when it is undocumented, because then it sits nowhere.

Three questions worth putting to any MPS used for decumulation clients:

1. How is income raised? Pro rata across the model, from a designated sleeve, or by the platform selling whatever is largest? The third is more common than firms expect and it is not a portfolio decision anybody made.
2. Where does the cash buffer live? Inside the model, outside it on the platform, or nowhere? Each answer changes the stated risk profile, the fee basis and who is responsible for refilling it.
3. What happens in a 20% fall? Specifically: does anybody receive an alert, and is there a documented decision rule, or does the client simply keep drawing until the next scheduled review?

A firm that cannot answer the third question has an operational gap rather than an investment one, and it is the gap that produces the complaint.

The underlying choice between a model service and a tailored mandate is covered in model portfolio services versus bespoke portfolios. For decumulation the balance shifts, because the features that make an MPS attractive, standardisation and scale, are the features that make it indifferent to an individual withdrawal pattern.

What the oversight has to cover

If decumulation clients are in a third party managed solution, the ongoing oversight has to ask questions the standard framework does not.

Performance against benchmark is necessary and insufficient. A portfolio can beat its index over a year in which the client’s withdrawal rate quietly became unsustainable, and recording the first without the second is how a file ends up with a material information gap.

The additions worth building into the review:

• Withdrawal rate against the plan. Not the rate agreed three years ago. The rate actually being taken against the portfolio’s current value.
• Buffer adequacy. How many months of income are available without selling into a falling market.
• Capacity for loss, revisited. Circumstances change faster in retirement than in accumulation. A health event, a property sale, an inheritance or a spouse’s death all move it.
• Dispersion within the risk label. Two MPS ranges both labelled “balanced” can hold materially different equity weightings. For a client drawing income, that difference is not cosmetic.

That last point connects to the wider measurement problem set out in how to compare DFM performance, and the governance side belongs in the framework described in ongoing DFM oversight under Consumer Duty.

Why this gets harder in April 2027

Pensions come within the scope of inheritance tax from April 2027, which changes the order in which many clients should be drawing their assets. We set out the mechanics in pensions and IHT from April 2027.

The portfolio consequence is the part that has had less attention. If a client’s drawdown sequence changes, so does the time horizon of each pot. A pension that was going to be preserved and passed on, and could therefore carry equity risk indefinitely, becomes a pot being spent down on a defined timetable. The suitable portfolio for it is not the same portfolio.

Firms that review the tax position without revisiting the investment position will have changed the plan and left the portfolio behind. Which is the same failure as the one TR24/1 identified, arriving by a different route.

A short file test

For any client currently in decumulation, the file should be able to answer five questions without anybody having to reconstruct the reasoning:

1. When was capacity for loss last assessed, separately from attitude to risk, and what was concluded?
2. What is the current withdrawal rate, against the current portfolio value?
3. How is income physically raised, and who decided that?
4. How much cash is available before the portfolio has to be sold into a fall?
5. If the portfolio is the same one the client held while contributing, why is that still suitable?

The fifth is the one that most often has no answer. It is also the one the FCA’s framing makes hardest to leave blank, because the regulator has already said the two positions are inherently different.

Answering it well does not require a separate decumulation proposition for every client. It requires the reasoning to exist in writing.