Income drawdown – changing the conversation

26 November 2018
Pension freedoms gives savers significant flexibility in deciding how much to take out of their pension each year.

This is driving dialogue about income requirements, where and how to invest in order to meet these, and the likelihood of achieving these income needs over a lifetime. In our view the key metric here is the latter. It’s often called income sustainability and it’s a measure of the likelihood of achieving the desired level of income.  Moving to focus on income sustainability means conversations about expectations for income needs in retirement and the implications of not meeting these.

For some clients income sustainability may not be so important, particularly if they have other sources of income and are less concerned about how long their savings last.  For others, it is extremely important that they understand the risk around potentially running out of money. While no one can predict the future, raising awareness of income sustainability can help you and your clients make better decisions around the amount of income to take and set some expectations around it. For example it might be helpful to understand how future income is impacted in the event of a market downturn.

Setting expectations

For those clients who find that their expectations are beyond what is achievable with their savings, your conversation will become one about options. Having an understanding of income sustainability for a range of income levels, investment options, and retirement dates will help you frame this conversation. Ongoing review is also crucial during this phase in order to monitor changes in circumstances and help the client to improve their outlook.

Investment solutions designed for taking income

We have a range of multi asset portfolios called the Governed Retirement Income Portfolios – or ‘GRIPs’ for short – which are designed to help your clients achieve a sustainable level of retirement income and help reduce the impact of sudden market falls. Each quarter we monitor the income sustainability figure for all five GRIPs for two types of income profiles : 2.25% real income for life and 4% fixed income with an allowance for a 1% total charge.

Helping your conversations

To help bring income sustainability to life for you and your clients we have developed a heat map which shows the sustainability of different withdrawal rates over different terms. This is based on investment in GRIP3 and a 1% annual charge.

  Income %
15 100% 100% 100% 100% 100% 100% 99% 97% 93%
20 100% 100% 100% 100% 99% 95% 88% 73% 47%
25 100% 100% 100% 98% 93% 80% 55% 30% 14%
30 100% 100% 98% 92% 78% 54% 29% 14% 5%
35 100% 98% 95% 83% 61% 36% 17% 6% 2%

All values correct using a 1% AMC and using GRIP3

Highly sustainable 85% - 100%
Quite sustainable 75% - 84%
Barely sustainable 50% - 74%
Not sustainable 0% - 49%

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. 

About the author

Lorna Blyth

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.

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