Decumulation advice, helping clients turn a pension pot into sustainable retirement income, is scrutinised differently from accumulation advice, and the FCA's thematic review of retirement income advice (TR24/1, March 2024) found real weaknesses across the market. A defensible suitability case rests on evidencing income sustainability, addressing sequencing risk, assessing capacity for loss specifically in a decumulation context, using realistic cash flow modelling, and committing to genuine ongoing reviews. The central question shifts from "will this grow?" to "will this income last?"
Key takeaways
- Decumulation is not accumulation in reverse, running out of money is a harm that growth-focused thinking can miss.
- The FCA's TR24/1 retirement income review highlighted weak cash flow modelling, generic risk profiling, and insufficient consideration of sustainability and sequencing risk.
- Sequencing risk, poor returns early in retirement while drawing income, can permanently damage a plan, even if average returns are fine.
- Capacity for loss must be assessed for the decumulation phase specifically, not carried over from accumulation.
- Cash flow modelling with realistic, stress-tested assumptions is central to evidencing sustainability, and reviews must be real and ongoing.
Why decumulation advice is judged differently
In accumulation, time and regular contributions can absorb a bad year. In decumulation, the client is drawing an income and no longer contributing, so a downturn early on can do lasting damage. The stakes are asymmetric: the worst outcome is not underperformance but a client running out of money in later life. This is why regulators, the Financial Ombudsman, and complaints reviewers apply particular rigour to retirement income cases, and why a strong evidence trail matters.
What the FCA's TR24/1 review found
The FCA's review of retirement income advice examined how firms advise clients on drawing an income in retirement. Recurring weaknesses included: cash flow modelling built on unrealistic or unstress-tested assumptions; risk profiling that used the same tools and thinking as accumulation without adapting to decumulation; insufficient focus on income sustainability; and inconsistent ongoing review of whether a plan remained on track. The clear message: firms need a decumulation-specific approach, not a repurposed accumulation process.
The five pillars of a defensible decumulation case
1. Income sustainability. Can the plan realistically deliver the required income for as long as the client may live, allowing for inflation? This means testing against longevity and market scenarios, not a single central projection.
2. Sequencing risk. Explicitly consider the impact of poor early returns while drawing down. Mitigations, cash buffers, a natural-yield element, flexible withdrawals, or partial annuitisation, should be considered and the choice justified.
3. Capacity for loss (decumulation-specific). Assess how much investment loss the client can absorb while taking income without an unacceptable fall in living standards. Attitude to risk alone is not enough; capacity for loss in this phase is decisive.
4. Cash flow modelling. Use realistic return, inflation and longevity assumptions, and stress-test them (e.g. a market fall, higher inflation, living longer than expected). Document the assumptions and what the modelling shows.
5. Ongoing review. Decumulation plans need genuine monitoring, spending changes, markets move, health changes. Commit to reviews that actually test sustainability, and evidence that they happen.
Guaranteed vs flexible income, frame the trade-off
A defensible case usually shows the client understood the trade-off between security (guaranteed income, e.g. annuities, which have become more attractive as rates rose) and flexibility (drawdown, with market and longevity risk borne by the client). Blended approaches, securing essential spending and leaving discretionary spending flexible, are often suitable, but the reasoning must be tied to the individual's needs, not asserted.
Evidencing understanding under the Consumer Duty
The consumer understanding outcome bites hard here. Retirement income concepts, sequencing risk, sustainable withdrawal rates, the difference between guaranteed and flexible income, are exactly the kind of thing clients struggle with. The suitability report must explain the recommendation and its risks in a way the client can genuinely follow, and there should be evidence they understood the choices, especially any irreversible one.
Frequently asked questions
What is decumulation advice?
Advice on converting accumulated pension and investment savings into a sustainable income in retirement, typically through drawdown, annuities, or a blend of both.
What is sequencing risk?
The risk that poor investment returns early in retirement, while the client is drawing income, cause lasting damage to the plan, even if long-term average returns are acceptable.
Why is capacity for loss different in decumulation?
Because the client is drawing income and no longer contributing, losses cannot be recovered through time and further saving in the same way. Capacity for loss must therefore be assessed specifically for the income-drawing phase.
What did the FCA's TR24/1 review say about retirement income advice?
It identified weaknesses including unrealistic or unstress-tested cash flow modelling, accumulation-style risk profiling applied to decumulation, insufficient focus on income sustainability, and inconsistent ongoing reviews.
Is cash flow modelling required for decumulation advice?
It is not a single mandated tool, but realistic, stress-tested cash flow modelling is central to evidencing that a retirement income plan is sustainable, and its absence is hard to defend.