Drawdown  

Half of drawdown savers could run out of money

Half of drawdown savers could run out of money

Only half of drawdown customers are taking an income which has a high likelihood of lasting them for the rest of their life, according to analysis from Royal London.

Figures from the mutual insurer’s drawdown governance service – which helps advisers engage with their drawdown clients - show 47 per cent of savers have a higher than 85 per cent chance that their pension pot will last them for life.

Conversely, 53 per cent have a higher risk of running out of income. However, in some cases customers will have purposely chosen to draw their pot down more aggressively, Royal London said.

For instance, someone may be 60 years old and choosing to draw down one pot to give them income before their other pots become available at age 65.

The drawdown governance service - used by 5025 advisers across 3078 firms - calculates an income sustainability score for the adviser’s client, and tracks their progress against this score every quarter and highlight if there are any changes.

Royal London has developed a heat map to assess the sustainability of different withdrawal rates over different terms, which shows that over a 15-year term a 6 per cent withdrawal rate is highly sustainable. However, as the term increases this become unsustainable.

All values are calculated using a 1 per annual management charge and using the Governed Retirement Income Portfolio 3, one of Royal London’s five portfolios designed specifically for clients in income drawdown.

Financial advisers have previously warned against a "one size fits all" approach towards calculating drawdown rates.

According to Lorna Blyth, head of investment solutions at Royal London Intermediary Pensions, for some income drawdown customers "income sustainability is not so important as they have high capacity for loss".

She added: "For others it is extremely important that they understand the risk around potentially running out of money.

"Advisers can use the drawdown governance service to make sure their clients are on track with their retirement goals and [it] gives them prompts to speak to them if their circumstances change."

maria.espadinha@ft.com