Drawdown investors may have lost two years worth of income in market volatility

25th April 2016

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Volatile markets could have wiped up to two years of retirement income off the savings pots of those who entered income drawdown in April 2015[1], according to new research from pension firm Aegon. If market conditions continue on this trajectory, five years of volatility could become a decade of lost income.

Aegon has commissioned research from consultancy eValue to establish what is a sustainable level income for someone taking drawdown. This research shows that for a 65 year old retiree with a £250,000 pot a truly safe level of sustainable income is £6,325 equivalent to an income rate1 of 2.53%.

The first of what Aegon terms the ‘Generation Freedom’ retirees taking advantage of the new pension flexibilities in April last year have faced a 12% fall in the FTSE 100 and paltry returns on cash deposits.

Someone investing in a fund with a risk rating of 4 (see figure 1), a relatively equal investment mix of bonds, domestic and overseas equities and some property, would have seen their fund value fall by 1.8% over the past 12 months.

A 65 year old retiree with a £250,000 pot, advised to take a sustainable retirement income rate[2] of 2.53% per annum at the time, would now have to adjust this down to 2.44%, (see figure 2) or risk running out of money up to two years earlier than expected. For a pot of this size an annual income of £6,325 would need to fall to £6,092 to have a near certain chance of lasting them 30 years.

Barry Cudmore, Aegon’s guarantee solutions spokesperson, said: “It’s absolutely vital that people have a grasp of the impact that the markets can have on retirees’ income levels and their chances of running out of income later in life. Education is key. Advisers have a really important role to play in helping people understand their options at retirement whether they choose drawdown or a guaranteed option. For those who want flexibility and to keep their money invested but don’t want to be exposed to the downside risks of market exposure, there are solutions available that lessen the need for constant income adjustments.

“Income solutions that are guaranteed leave people less exposed to market fluctuations and can provide both income guarantees and access to cash when needed. For advisers, this means turning negative conversations about reducing sustainable income levels, into positive conversations about income preservation and even locked in gains.”

Mark Grimes, Product Director at eValue, comments: “This research casts a light on the outcomes for those entering retirement post-pension freedoms. We already know more about what choices retirees are making around their pension pots and retirement income and, with this extra understanding from eValue’s Insight asset model, we now have a realistic view of pension income expectations and returns, as well as the impact that initial market volatility can have on retirees’ financial wellbeing.”

Fig 1. Sustainable retirement income at April 2015

Source: eValue 2016

Investment Sustainable Income
Risk Rating 4 2.53%

 

Fig 2. Sustainable retirement income at April 2016

Source: eValue 2016

Investment Sustainable Income
Risk Rating 4 2.44%

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