03 December 2018

Sustainable income levels are vital to safeguarding portfolio strength during periods of investment volatility

4 min read

 
Helen Morrissey, Personal Finance Specialist

Helen Morrissey

Corporate PR Specialist – Long Term Savings

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Taking a sustainable level of income is vital in helping drawdown customers maintain a resilient portfolio during periods of investment volatility according to Royal London.

Taking a sustainable level of income is vital in helping drawdown customers maintain a resilient portfolio during periods of investment volatility according to Royal London.

Customers in income drawdown particularly need to think about the impact of volatility on their pension. While someone building up a pension can mitigate the effect of market falls by continuing to make contributions to their pension, those in income drawdown are not only not making contributions, they are actively drawing down their fund so it has less chance to recover from the effects of volatility.

 

The mutual insurer used data from its Drawdown Governance Service to model potential outcomes of what would happen to someone’s income if the markets were to drop by 10%, defined by a fall in the FTSE All Share of more than 10%.  The graph below shows four instances since 2008 when this has happened. Current uncertainty over issues such as Brexit looks likely to bring further volatility to the markets in the coming months.

Growth percentage

The figures take the example of two people with £100,000 to be invested over a 25 year term with one person taking an income of 4% per year while the other takes an income of 5% per year.

If there were a 10% fall in the markets then the person taking 4% per year would have seen their income sustainability score fall from 92.6% to 81.5%. The person taking 5% per year would have seen their income sustainability score plummet from 55.1% to just 28%.

According to the Drawdown Governance Service a sustainability score of 85% or more leaves someone with a high degree of certainty that their income will last.

Commenting on the figures Lorna Blyth, head of investment solutions at Royal London, said: “Long term investors must be aware that at times their investments will be subject to periods of investment volatility but that there are investment strategies available to help mitigate any potential damage. Ensuring income is being taken at sustainable levels is an important part of this and customers can work with their advisers to assess their portfolio and ensure they are taking out an income that meets their needs over the long term and is sustainable through bouts of investment volatility.”

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Notes to editors

The Drawdown Governance Service is provided by Royal London to help advisers engage with their drawdown clients. It will calculate an income sustainability score for their clients, track their clients’ progress against this score every quarter and highlight if there are any changes.

For further information please contact:

Helen Morrissey, Corporate PR Specialist – Long Term Savings

About Royal London

Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June.

At Royal London, we’re proud to champion the value of impartial advice. We believe it plays a crucial role in connecting people with the products that are right for them – and is key to delivering better outcomes and experiences for our customers. At the same time, it helps to build trust in our products and services.

Royal London works alongside advisers not in competition with them. That’s why we’ve made some key commitments to the intermediary market. You’ll find more detail on our commitment to advisers at http://adviser.royallondon.com/campaigns/our-commitments/