How sustainable income levels can protect portfolio strength

15 February 2019

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Taking a sustainable level of income is important in helping drawdown customers maintain a resilient portfolio during periods of investment volatility.

Customers in income drawdown should think about the impact of volatility on their pension. While someone building up a pension can mitigate the effect of market falls by continuing to make contributions to their pension, those in income drawdown are not only not making contributions, they are actively drawing down their fund so it has less chance to recover from the effects of volatility.

We’ve used the data from our Drawdown Governance Service to model potential outcomes of what would happen to someone’s income if the markets were to drop by 10%, defined by a fall in the FTSE All Share of more than 10%.  The graph below shows five instances since 2008 when this has happened. Current uncertainty over issues such as Brexit looks likely to bring further volatility to the markets in the coming months.

investment volatility graph

The data from our Drawdown Governance Service lets us look at the scenario of two people who have £100,000 to be invested over a 25-year term, with one person taking an income of 4% per year while the other takes an income of 5% per year.

If there was a 10% fall in the markets then the person taking 4% per year would have seen their income sustainability score fall from 91.7% to 79.8%. The person taking 5% per year would have seen their income sustainability score plummet from 53.3% to 26.1%.*

According to the Drawdown Governance Service a sustainability score of 85% or more leaves someone with a high degree of certainty that their income will last.

Commenting on the figures Lorna Blyth, Head of Investment solutions at Royal London, said: “Long term investors must be aware that at times their investments will be subject to periods of investment volatility but that there are investment strategies available to help mitigate any potential damage. Ensuring income is being taken at sustainable levels is an important part of this and customers can work with their advisers to assess their portfolio and ensure they are taking out an income that meets their needs over the long term and is sustainable through bouts of investment volatility.”

If you’d like to find out more about our Drawdown Governance Service please speak to your usual Royal London contact, or click here

*Royal London Drawdown Governance Service data 31.12.2018

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

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.