Drawdown  

Sustainable withdrawals support portfolio growth

Sustainable withdrawals support portfolio growth

Income drawdown portfolios could see growth if annual withdrawals are kept within sustainable levels, according to Royal London.

Analysis on the performance of the Royal London Governed Retirement Income Portfolios (Grips) revealed that in spite of taking an income of between 4 per cent and 6 per cent per year, a £50,000 investment made seven years ago would have accrued more today than originally invested.

Royal London's figures showed that a £50,000 investment in Grip 3 with an income of 4 per cent a year over seven years would currently stand at £63,417.

Meanwhile, someone who invested in Grip 5, again taking a 4 per cent annual income, would currently have more than £73,000 in their portfolio.

This compared with a benchmark return of £56,288.

Lorna Blyth, head of investment solutions at Royal London, said: “An income drawdown portfolio can enjoy strong investment growth but if the levels of withdrawals are too high then customers risk running short of money.

“These figures show that by working with an adviser to keep withdrawal rates at a sustainable level, customers can benefit from a resilient income drawdown pot that can weather the storms caused by issues such as trade wars and Brexit.”

The Grip portfolios, launched in August 2012, range from one to five, depending on the client’s attitude to risk with Grip 1 being the lowest risk.

Assets under management of the Grip portfolios currently stands at £3.7bn, according to Royal London.

Name

Annual income level

 

4%

4.5%

5%

5.5%

6%

ABI Mixed Investment 20-60% shares - pen

£56,288

£54,214

£52,140

£50,065

£47,992

GRIP 1

£53,546

£51,468

£49,390

£47,312

£45,234

GRIP 2

£58,359

£56,222

£54,084

£51,945

£49,808

GRIP 3

£63,417

£61,219

£59,020

£56,821

£54,622

GRIP 4

£69,444

£67,176

£64,907

£62,637

£60,369

GRIP 5

£73,712

£71,384

£69,055

£66,725

£64,396

Source: Lipper 27.08.2019

Fiona Tait, technical director at Intelligent Pensions, said: “For the vast majority of people managing sustainable income levels is essential if they are to avoid poverty in later life. However, predicting just what is sustainable is easier said than done.

“While advised clients are likely to have the benefit of an individual cashflow model, which is tailored to their precise needs and circumstances, many pensioners are not so lucky.

"They have to work out for themselves how much they can afford to spend each year."

Ms Tait added: “Most estimates suggest a sustainable rate would fall somewhere between 3-4 per cent over the long term.

"The higher figure from Royal London, therefore, reflects a strong performance over the last seven years. Undoubtedly, this has been partly due to favourable market conditions.

“We would not advise raising withdrawal rates as a result of this performance however, it could indicate a good opportunity for those who have being taking lower amounts to access a bit more at their next annual review.”