As the government grapples with the fear of non-advised drawdown clients running out of money in retirement, Royal London has drawn up a map of ‘what good drawdown looks like’.
The provider analysed the data of 17,000 of its advised drawdown customers and found a “very clear correlation” between the size of the pot and rate of withdrawal, with those with the largest pots taking the smallest percentage withdrawals
The most common rate of withdrawal was in the 4-5 per cent band, where the average fund value was £121,114 and the median value was £81,560.
This was broadly in line with traditional notions of a ‘sustainable’ rate of withdrawal, Royal London said, although actuaries have recently put the ‘safe’ drawdown rate at closer to 3.5 per cent.
Royal London’s research showed more than a third of the sample clients were withdrawing between 3 per cent and 6 per cent per year, with average fund values ranging from £88,890 to £146,140.
It also found about one in six of the sample was withdrawing more than 10 per cent per year.
But these were typically the clients with the smallest pots, the median of which was about £30,000, which suggested the pots were not being used to support people throughout retirement but there were other sources of income on which the client was relying.
Some savers, for instance, may be rapidly running down one pot earlier in retirement before state pension and occupational pensions come into payment, Royal London said.
Steve Webb, director of policy at the firm, said: “Our data shows that for those with larger pots, which are likely to form a major part of their retirement income, current withdrawal rates for those taking advice are typically in low single figures – there is no sign of ‘Lamborghinis’ in our data.
“Faster withdrawal rates tend to be associated with much smaller pots and this is likely to be for individuals who have other sources of income in retirement.
“This data suggests that for advised customers there is little reason for concern that pension freedoms are being used irresponsibly, but does show the potential advantages in getting more people take advice and guidance at retirement.”
Table: Data from advised Royal London customers on typical withdrawal rates from drawdown products, together with average pot size
Withdrawal % Bands | Number of Income Release Plans in force | % of Total | Avg. Fund Value | Median Fund Value |
0-1% | 179 | 1.01% | £261,212 | £182,147 |
1-2% | 412 | 2.32% | £219,270 | £158,253 |
2-3% | 911 | 5.13% | £184,569 | £115,036 |
3-4% | 1,722 | 9.71% | £146,140 | £94,485 |
4-5% | 2,446 | 13.79% | £121,114 | £81,560 |
5-6% | 2,362 | 13.31% | £101,610 | £68,925 |
6-7% | 2,238 | 12.61% | £88,890 | £60,237 |
7-8% | 1,960 | 11.05% | £79,144 | £54,830 |
8-9% | 1,512 | 8.52% | £72,005 | £53,874 |
9-10% | 1,004 | 5.66% | £68,881 | £48,196 |
10% and above | 2,995 | 16.88% | £46,247 | £31,269 |
Total | 17,741 | 100.00% | £99,416 | £63,259 |
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Note: The above figures include all DGS policies as at 1st Feb 18 for ages between 55 and 75 where the expected income level is greater than 0, excluding PCLS only policies. | ||||
Paul Stocks, financial services director at Dobson & Hodge, said the perceived 'save' withdrawal rate depended on whether it was inflated or not.
He said he'd be more likely to work to 4 per cent or more if not inflated, depending on whether the client wants more income while they are still relatively young.
He said: "Our drawdown strategy is to have a diverse portfolio, typically use cash to cover 1-2 years of income, sell down as required and [do this by] taking profits to, wherever possible, avoid losses.
"For larger pots there may also be some element of secured income if we deem it to be required. That is very much client specific.
"If a client is moving into drawdown, they’ll remain invested up to retirement and beyond given that the time horizon could be 30 plus years."
carmen.reichman@ft.com
