Royal London warns of unsustainable income withdrawal rates

Royal London warns of unsustainable income withdrawal rates

The average income withdrawal for Royal London customers is 6.2 per cent of the fund value, net of fees, which the mutual provider warned could be unsustainable.

Analysis carried out by Royal London shows that over a 15 year term a 6.2 per cent withdrawal rate is highly sustainable, but after this it quickly becomes unsustainable.

Most (67 per cent) of Royal London’s income drawdown customers are aged between 60 and 69 years so by the ages 75 to 84 a withdrawal rate of 6.2 per cent may no longer be possible as fund sizes deplete.

Lorna Blyth, pensions investment strategy manager at Royal London, said that the vast majority of customers taking a fixed rate of income were not making any allowance for inflation.  

"This might be OK while we have low inflation rates but the latest data from the Bank of England shows inflation is above the government’s target rate and one of the risks that advisers may well need to discuss with their clients at their next review," she said.

The average fund size between 60 and 69 is £94,800.

Other analysis by Royal London showed that the vast majority of customers (75 per cent) initially took their tax free cash and then started taking a regular income some years later. But there is a small but increasing number of drawdown customers who are starting to take an income from the outset. 

Ms Blyth said: "Identifying any emerging trends is important in the early days of pension freedoms as there remain concerns that people could potentially run out of money.”

Gemma Siddle, director of client services at Eldon Financial Planning, said the withdrawal rate depended on client circumstances and the type of investments in the fund.

"Not all clients want a sustainable income, some want to spend it down because your typical spending pattern in retirement is higher in the early years and then tails off," she said.