Why there’s no such thing as a typical drawdown customer

25 July 2019

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Find out what our data tells us about the ‘average’ client in drawdown.

Before pension freedoms, the majority of retirees were choosing an annuity over income drawdown. However, with more retirees looking to take advantage of the new found flexibility,  income drawdown has quickly become the retirement income path of choice.

The huge expansion of the income drawdown market has implications for advisers. It’s safe to say there’s no such thing as a typical drawdown customer; with data from our drawdown governance service (DGS) showing customers are taking full advantage of pension freedoms to take their income in a variety of ways.

We launched the DGS three years ago as a tool for advisers to assess their clients’ income sustainability.  Every quarter, the DGS calculates a new income sustainability score for clients based on what’s happening in the market. This helps advisers review whether clients remain on track to meet their income goals, and can form a basis for conversations with the client if changes need to be made.

An income withdrawal rate of 4-5% a year has traditionally been considered sustainable. However, the DGS data showed two broad groups of customers using income drawdown in different ways.

The first group mostly have retirement savings of less than £25,000 and take their income at a higher median rate of approximately 10%. Although a withdrawal rate of 10% would be unsustainable through retirement, many of those taking an income at this rate are likely to be planning to rely on other income later in retirement.   For example, they may be running down one source of income to support them in early retirement before their State Pension and other pension income kicks in at a later stage.

However, the median withdrawal rate decreases steeply as the value of retirement savings. Those with retirement savings of over £250,000 are taking income at a much lower median rate of 4%. The table below shows the spectrum of income rates:

Fund sizeMedian withdrawal rate

Under £25,000

10

Between £25-49k

8

Between £50-99k

6

Between £100-149k

5

Between £150-199k

5

Between £200-249k

5

Over and including £250k

4

The figures show how much the income drawdown market has evolved in the last four years, with retirees using it regardless of how much retirement savings they have. While the magic 4-5% income withdrawal rule may still hold true for those with more retirement savings, this isn’t the case across the board. Advisers need to be aware that retirees with less retirement savings are withdrawing income at a greater rate. This brings opportunities and challenges for advisers in terms of being able to take a holistic view of someone’s financial circumstances and requirements and working out whether they have a truly sustainable income plan in place.

To find out more about how our drawdown governance service could help you and your clients, speak to your usual Royal London contact. 

Source: Royal London Drawdown governance service, July 2019. 

Last updated: 04 Sep 2019

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.