Key points

  • One of the common approaches to settling upon an appropriate retirement investment portfolio is the use of a multi-pot model – separating pots of assets according to different underlying purposes.
  • However, the demonstrable weakness of many multi-pot drawdown portfolios is that they are automatically rebalanced across the pots, meaning there is no discretion applied to the timing of sales of higher-risk assets to refill the short-term pot.
  • Nevertheless, there are options, such as the use of income-focused equity and multi-asset portfolios in the mid and long-term pots, and directing those dividends straight into the short-term pot.

Since the introduction of the pensions freedoms legislation in 2015 which allowed savers more flexibility in how they access their defined contribution pension scheme, retirees have embraced the opportunity to do something other than lock into annuities at retirement. The majority now exercise this freedom, with most of those who have larger DC pots continuing to invest while drawing down to meet the balance of their income requirements in retirement. With this option comes a plethora of decisions to be made and potential risks. However, few are well equipped for the task and only a small proportion take qualified professional advice; fortunately guidance is increasingly available.

Whether guided or advised, one of the common approaches to settling upon an appropriate retirement investment portfolio is the use of a multi-pot model. By separating pots of assets according to different underlying purposes – for example a ‘wallet’ for day-to-day spending, a ‘rainy-day fund’ for unexpected expenses, and a long-term pot to generate returns – retirees implicitly commit to using those assets for a particular purpose. However, does the multi-pot model for retirement investment decision making result in the best use of assets or is it simply a cognitive tool to assist asset allocation?

The implicit commitment of assets to pots can mean that the ‘leave well alone’ assets for later life offer less temptation to overspend today and the ‘wallet’ pot offers some degree of confidence that parsimony is unnecessary – avoiding the risk of underspending. There is a clear mental accounting that matches the pots to purpose, providing discipline.

Evaluating the multi-pot retirement investment strategy

Nevertheless, how optimal is the investment strategy that is implied by this pot-type model and how does it navigate market uncertainty? Critically, does it reduce sequencing risk, and can other investments offer a superior outcome?

Evaluation of the multi-pot model is a task that several researchers (e.g. Huxley, Burns and Pfau) have undertaken already.1,2 The value it creates has been demonstrated to be connected to the mechanism used for rebalancing across the pots as markets move and income is drawn. Clearly, the parameters used for comparing results, as well as the nature of the market model used, are also important. While different examinations have revealed different winners, there is one unifying strand in the research, which relates to the weakness of market-agnostic time-based rebalancing to a static target asset allocation. The fact that this is a common approach used in many cases suggests clients could potentially be better served.

The demonstrable weakness of many multi-pot drawdown portfolios is the fact they are automatically rebalanced across the pots. This means that spending from the ‘wallet’ is effectively just spending across all the pots. There is no discretion applied to the timing of sales of higher-risk assets to refill the spending bucket, nor is there ongoing re-evaluation of the mix between growth and later-life (perhaps annuity purchase) pots. There are notable exceptions, such as what Nest is doing in its retirement default portfolio, where trustees decide how much to pass over to the ‘wallet’ each year and consider the overall appropriate asset mix. The challenge is doing this in a personalised manner rather than through a one-size-fits-all default structure.

Even those pensioners benefitting from personalised advice from an independent financial adviser may find that discretionary rebalancing is not a service that is offered. Advisers are typically specialists in personal finance and tax planning rather than investment markets. Making discretionary portfolio changes puts the adviser at risk of being criticised for mistiming the asset switches. In many cases, they may be uncomfortable making market timing calls, and historical practice may have been to rely on ‘pound cost averaging’. While this has been adequate in regular savings accumulation, it is demonstrably not the case for decumulation investors, as it results in ‘pound cost ravaging’, where programmed withdrawals from portfolios result in pensioners experiencing higher wealth uncertainty than the volatility of underlying assets.

Even when a discretionary portfolio management service is employed, the push for efficiency means that standardised model portfolios are often used and, as a result, the asset allocation is not client-specific so cannot take account of any particular level of income being drawn down.

What can be done?

Clearly there are some discretionary advisers who, for a suitable fee, will use their own research to make the timing call for their clients. For those that do not want to pay such fees, and for institutional DC plans offering decumulation in-plan using robo advice to guide members, other options are available.

If the multi-pot model is deemed unnecessary, a risk-appropriate multi-asset investment could be used given that, within the portfolio, the asset manager may make asset-allocation calls as part of the overall active investment process. While this may lack calibration to individual drawdown levels, both risk capacity and market path dependency can be actively and expertly managed.

The potential benefits of an income focus

For those that want to retain the personalisation, cognitive comfort and ease of understanding that the multi-pot model offers, there may be another option – the use of income-focused equity and multi-asset portfolios in the mid and long-term pots. By using their income share classes, the dividends can be directed straight into the ‘wallet’. This effectively devolves the timing of moving assets to the individuals closest to the economic activity that actually underpins the returns as a whole – the organisations that are using pensioners’ capital. They are arguably in the best position to determine when they can pay sustainable dividends – they pay dividends when they feel this is the smartest way they can add value for their shareholders, as opposed to retaining earnings to finance growth or buying back shares. The fact that the pensioners’ portfolios contain a diverse array of dividend-paying securities means the timing of ‘rebalancing’ is smoothed by the separate decisions of the firms, each one making the optimal timing choice for its business.

The aim of income strategies such as our Global Equity Income and Multi-Asset Income strategies is, of course, to generate attractive returns through holding companies accountable for their decisions through stewardship, while carefully selecting those with the best prospects for sustaining and growing the income and overall return.

Naturally, one may ask, in this arrangement, what if the income flowing into the short-term/cash pot is not enough (or is too much) compared to the pensioners’ actual spending needs?

In such a case, a pensioner’s additional demand could serve as a first indicator (to them) that their spending may be too high to be sustainable over the long term without capital erosion. Alternatively, if the short-term/cash pot is growing steadily, it could indicate that their investments are doing well enough to support additional spending. In either case, this would lead to a need to engage with the drawdown platform, along with its built-in guidance tools. In the process, the pensioner should actively reconsider their situation, rebalancing their pots if necessary, and become cognisant that they shoulder responsibility for any decision to decumulate faster (or slower) than is naturally supportable. In doing so, they can be guided as to the risks they are exposing themselves to.

The pensions freedoms come tied up with a complex set of personal responsibilities, and for those who find the burden is too great and are not prepared to seek expert advice, the annuity option is always available. 


  1. Stephen J. Huxley and J Brent Burns, ASSET DEDICATION: How to Grow Wealthy with the Next Generation of Asset Allocation, 22 October 2004.
  2. Wade D. Pfau, Time Segmentation as the Compromise Solution for Retirement Income, 27 March 2017.


Christopher Nichols

Christopher Nichols

Head of client solutions


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