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Drawdown governance service - Q3 2024 update to income sustainability scores
Income sustainability scores for Q3 2024 have now gone live for our drawdown governance service. This quarter, clients should see similar or higher sustainability scores following our calibration update and market movements experienced since the last update in May.
Market review over the last quarter
Watch Trevor Greetham’s review in this webinar for insight into market performance over the last quarter.
Drawdown governance service (DGS) model update
This quarter’s model calibration shows an increase in returns across most asset classes which largely increased the expectations of clients meeting their income targets in the short, medium, and long term. Performance of our Governed Retirement Income Portfolios (GRIPs) has been strong since our last update, which will also add to higher scores for those invested in one of the portfolios.
Although annuity rates show signs of tailing off, they remain at high levels which increases the buying power for our Income for Life customers (taking drawdown then buying an annuity). This will be translated through higher scores in comparison to our Income to Age customers.
The graph below highlights how average annuity rates have varied in relation to the performance of the GRIPs since launch. This relationship is important as it can directly impact a client’s income sustainability, depending on their investment target*:
*Source: Lipper, Royal London, as at 1 August 2024. How investments have performed in the past doesn't tell you anything about how they might do in the future. Prices could rise, but they can fall too, so clients may get back less than they started with.
Our houseview
Our ‘houseview’ represents our current opinion on what would be a sustainable level of income for someone aged 65 just starting out in drawdown. Note that our houseview doesn’t capture the impact of recent market turmoil on the value of pension savings and assumes that the individual is just starting out in drawdown, investing in GRIP 3 with a yearly charge of 1%.
This quarter we retain our houseview that a 5% nominal withdrawal rate is highly sustainable. We'll continue to monitor and update our houseview as the economic backdrop evolves.
The value of the DGS is its ability to provide visualisation on the impact of not just current market conditions, but also fund performance and actual client income levels on sustainability scores. Ideally, this means you and your clients can responsibly adjust income levels to reflect the wider economic environment and ensure you maximise the likelihood of sustaining income throughout retirement or until they buy an annuity.
A reminder of how the DGS ratings are calculated
The income sustainability scores take into account:
- Nominated sustainability score – what’s the client’s score relative to their nominated ‘target’?
- Investment performance – have the client’s investments outperformed inflation?
- Annuity rates – how have market annuity rates changed?
- Income plan – has the client taken more or less income than initially discussed with you?
These factors work together every quarter alongside the Moody’s assumptions to give you and your clients an idea of whether their income sustainability is still on track or needs some attention.
Setting a reasonable income relative to your client’s investments is one of the key aspects of investing through drawdown. Our financial planning tool is useful in helping model different income scenarios and helping drive discussions when planning an income through retirement.
The underlying assumptions for the financial planning tool have also been updated this quarter.
To find out more log in to your account or visit our drawdown governance service page.