Our Drawdown Governance Service tracks clients’ plans against an income sustainability score and provides advisers with a robust drawdown review process.
We now have over 18,000 plans in the service and this data set allows us to understand much more about how advisers are managing client drawdown plans and to identify any emerging trends.
A key metric is average withdrawal rates and as you might expect there is no “one size fits all”. Drawdown customers at age 55-60 have a median withdrawal rate of 6%, whilst older customers at age 70-75 have a higher withdrawal rate of 7.6%. This is expected - as drawdown pots reduce through income withdrawal, the same amount of income will become a larger proportion of the remaining pot.
There are a small number of customers within the younger age groups with very high withdrawal rates. The effect decreases as age increases, meaning that at the older age groups we find less customers taking a very high income. These findings are in line with our view that there are a number of younger customers who will be happy to run down their pot and are most likely to have other income sources which they intend to use over the longer term.
There has been much debate in the industry on what a safe withdrawal rate looks like and various studies over the years have pointed towards 4% being considered a sustainable level of income. Our view is that individual circumstances will mean that it will be different for everyone. The real issue for advisers is how to set realistic expectations with clients in terms of what a sustainable level of income looks like and how it might change in the future.
Everyone’s needs and circumstances are different but typically a sustainable income will depend on a number of factors such as how much you have saved, how long you want to take income for, what charges you are paying and any investment growth you have received. Some of these factors will have a bigger impact than others, for example the shorter the term, the lower the income you want to take, the lower the charges and the higher the growth then the more likely it is that your income will be sustainable.
Since the launch of the Drawdown Governance Service in 2016, we have seen the proportion of plans with a sustainability score of less than 50% fall by about 7.5% (63% to 56%). This means conversely we have seen the proportion of plans which have a greater than 50% sustainability score increase by the same amount. In particular, the proportion of plans with an income sustainability score of at least 75% has increased by almost 8% (from 28% to 36%).
It is worth noting that charges will have an impact on income sustainability and should always be considered. For example, a client with a £100,000 pot taking annual income of £5,000 on a monthly basis could see his pot reduce by up to one third if he were to pay an additional 1% pa.
Royal London is a key player in the income drawdown market and we offer a range of retirement planning tools to help advisers understand client goals, sustainability of income and the suitability of their investment choice. If you would like to hear more about the support we can offer please contact your usual Sales Consultant or visit our tools and support section.
Head of Investment Solutions
Lorna is Head of the Investment Solutions team at RLI and has responsibility for the development and promotion of Royal London's investment proposition including the award winning Governed Range. She has worked in pensions and investment since 1990 and holds the IMC qualification and a Masters in Investment Science.