Making drawdown income less bumpy

I am sure you know that drawdown income is not guaranteed. The amount you can take each year from your pots at any point during retirement , whilst making sure you don’t run out of money later, will depend on the investment growth you get.

Put simply, after a bad year of investment returns, what you may be able to take going forward may reduce. Likewise, after a great year, you may take more.

Whilst you can never guarantee drawdown income, you can make certain parts of your retirement plan more certain. Lets look at how you can do this and then see which parts of the road you may wish to make smoother.

How to do this?

It’s all down to the how you invest your pots in retirement. Some investments such as short term cash, government and company bonds (i.e. loans to them) do not vary much in terms of value.

They all have a fixed return if you hold onto them until they pay you back. As an example UK Government loans, which they will back to you in 5 years, will right now give you a guaranteed return of around 4% a year. This is great way to match a payment you need in 5 years time.

Other investments, like shares, can go up and down in value a lot in any one year, perhaps even 20-30%.

So, as you can see, some investments are much less risky than others. Many providers drawdown default funds to invest your pots are simply a fixed mix of these. 60% of the less risky parts and 40% of the more risky parts.

Looking into them, even the less risky parts in these are not that safe. Why? the payouts are not linked to when you expect to take your money. In short, they do not take into account the payments you expect to take and when you want them. Its no good getting a guaranteed return over 10 years, if you are taking that money in 3. At that point the value may have gone down.

Why can’t they do this? It’s because unless they can see your Guiide (or any other withdraw tools) plan, they have no idea of what you want to take and when.

A better approach?

Imagine if the investment manager could see your Guiide plan. Then they could build the right mix of safer and risky investments. This could target the payments you actually expect to take, but also try to get you the growth you need by taking some risk.

Better than this, they can make parts of your income, which you care about most, more certain. They can do this whilst taking more risk on the parts you are less worried about.

Guiide and a large investment manager are thinking of teaming up on this. If we do, that approach would be possible. So, we are interested in what people think…….

Would you like this option and if given a choice, which part of your retirement income would you like to make more certain?

Option 1 – The earlier payments

Let’s look at the payments in your earlier retirement years. Lets say the first 10 years or so up to age 75. Why may someone want to make this more certain?

From a lifestyle view : In these years you are more active, spending more and in better health, so able to enjoy retirement more. For many that is a good enough reason to want to make sure these payments to be more certain.

From an investment view : Your pots are the largest and you may also be taking income solely from them, before any State Pension has started. That means you are taking large payments. If you get some bad investment experience then, it can have a much more dramatic effect on your overall future income and be very difficult to recover from.

Option 2 – Later payments

Looking at the payments needed from 75 onwards, so maybe the last 10 years or so of retirement.

From a lifestyle view : You may be less active, so may be able to reduce your income from previous levels if you need to. As the State Pension is in payment and growing, what you need from your pots will become less as a proportion of your overall income in later life. However, at this time of life you may have more medical expense or needs, or are just worried about being less well off in your final years. You may also be wishing to pass on some money and want to reduce the risk of what you can pass on reducing.

From an investment view : Your pots are much smaller, so the effect of a bad year is less. A 20% fall in £50,000 is much less in actual money terms than a 20% fall in £200,000. However, the risk of living longer gets higher as you get older and so you may want to have more certain money to insure against this (buy guaranteed income called an annuity) at some point in later life.

Is more choice better?

There are obviously pros and cons of both options, but we feel that being able to choose an option is far better for many than how current funds work, which just maintain exactly the same risk no matter your age. Under this new approach you could tailor the investments to what is most important to you.

We are always keen to hear our users views. So with that in mind, can we ask two questions?

If you think this would be a good choice in a drawdown product, which option would you prefer? Just leave your email below in the option preferred to help us see how best to develop this further.

Option 1 sounds great – I would choose earlier payments to make more certain

Option 2 sounds great – I would choose later payments to make more certain