Keeping income withdrawal rates within sustainable levels is vital to the long-term success of an income drawdown portfolio according to Royal London.
Analysis of the performance of the mutual insurer’s Governed Retirement Income Portfolios (GRIPs) shows that if someone had invested £50,000 in one of the portfolios when they were launched seven years ago and took out an income of between 4%-6% per year, in the vast majority of cases retirees would still have more in their portfolio than they had initially invested.
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.”
“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.”
For instance, someone investing £50,000 in GRIP 3 and taking an income of 4% per year over seven years would currently have £63,417 in their portfolio. Someone invested in GRIP 5 and taking a 4% annual income would currently have more than £73,000 in their portfolio. This compares with a benchmark return of £56,288.
The GRIPs were launched in August 2012 as one of the first investment solutions designed exclusively for customers looking to take a sustainable income from their pension. There are five different portfolios to choose from depending on the clients’ attitude to risk. GRIP 1 is the lowest risk investment mix while GRIP 5 is the highest.
Martin Bamford, chartered financial planner (CFP) and managing director of Informed Choice said in his blog: “The safe withdrawal rate is the percentage of your portfolio, which you can withdraw in the first year of your retirement. You can start by withdrawing this amount, and increase it in line with inflation every year, without the risk of exhausting your retirement portfolio.
“You’ll find plenty of references to the 4% rule in the UK. But the 4% rule applies only in the US; in the UK, if you had used 4% as your starting withdrawal rate, the probability of running out of money within 30 years would have been 23%. However, the UK’s safe withdrawal rate is pretty good, compared to most other countries.”