The average fund size among Royal London drawdown plans is £75,000. A third of pans are currently paying out regular income, of which the majority (72%) are in capped drawdown and the remainder in Flexi-Access Drawdown (FAD).
The average level of income being withdrawn is 11%, however the median is 7% indicating a greater variation amongst those who are taking higher levels of withdrawal, as might be expected in an environment where there are no income limits.
This is borne out by a comparison between FAD plans, where the difference between average and median is 12% (21% and 9% respectively), and capped drawdown where the trend is actually the other way but much less significant (6% and 7%).
The fact that there are more people taking lower levels of withdrawal is positive, however the median of 7% is probably too high to be sustainable for life unless other sources of income are forthcoming at a later date.
According to our stochastic modelling the majority (54%) of RL drawdown plans where regular income is being taken have less than a 1 in 5 chance of sustaining current income levels for life. Taken in isolation this is extremely concerning, and may suggest that our customers are either underestimating how long they will need income for, or have no way of translating this into a sustainable figure.
It must be emphasized however that these figures do not take into account the client’s actual objectives. Now that the DGS is live, advisers will have a chance to make changes to the parameters used for assessment.
Some clients may be deliberately running down the value of one pension in the knowledge that others exist, others may have started out taking a higher level of income which they already intend to reduce. Results over the next few quarters will therefore be interesting.
Happily, the next most popular group contains those who have the greatest chance of sustainable lifetime income, which is a definite indication that the issue of sustainability is being discussed and acted upon.
Of course sustainability is not just about what’s being taken out, but also what is being put in. Unfortunately very few plans – only 11% - are still being topped up, although of course under the freedom rules they could be, regardless of age or earnings.
Of specific interest to Royal London is the increasing use of our Governed Retirement Income Portfolios (GRIPs) with regular withdrawal plans. Overall the 20% of income policies are invested in GRIPs, however this has increased to 48% among new plans set up since the freedoms were introduced in April 2015.
In September we will revisit these figures to see what has changed and how plans are performing against their individual income targets.
Fiona joined the life and pensions industry in 1989. She is a Fellow of the Personal Finance Society, an Associate of the Chartered Insurance Institute and is currently Vice-President of The Insurance Society of Edinburgh. Fiona specialises in the areas of at retirement planning and pensions and divorce.