Income Drawdown (Unsecured Income) & Phased retirement

Many of our pension clients who have larger funds e.g. £200,000 + or indeed smaller amounts but who have other guaranteed income in retirement seriously consider Income drawdown.

This is where income is drawn from an invested fund rather than an annuity. This may give added investment risks and is therefore not suitable for everyone but the greater flexibility and in some cases improved death benefits can be attractive.

Our main website www.centralfinancialplanning.co.uk has some further information on retirement options but this is also an investment exercise so it is also featured here.

Investing for drawdown

There is a different approach required for the investment of a fund in drawdown to pensions that are still accumulating assets. It is especially important to have a diversified portfolio spread between different asset classes.

Some advisers still mistakenly put investors into managed type funds thinking that the fund manager will make these asset allocation decisions and provide the necessary spread. This can lead to unnecessary loss of funds when markets are depressed.

Most Managed funds have a high exposure to shares/share based funds as this is where real growth is made but when markets fall the whole value of a managed fund will fall as other assets such as property and fixed interest cannot make up the loss. An investor needing income then has to encash units at a loss.

In one of our portfolios based on risk profile and external actuarial input we create our own portfolio for you with a wide spread of assets. Then even if certain markets are down we can use the profits in other sectors to provide that years income, preserving your capital.

For larger funds we do use discretionary management but we have an arrangement with a particular firm who not only have excellent investment credentials but are also qualified in pension matters ensuring they do not compromise your portfolio but not understanding the complexity of the pension system.

Example Pension Income drawdown asset allocation

Your recommended investment portfolio

Having discussed in detail with you factors such as your attitude to risk and your growth and income needs, I recommend you invest in the following asset classes.

		UK Equity	26%
		Property	24%
		US Equity	16%
		Fixed Interest	15%
		Cash	10%
		European Equity	5%
		Far East Equity	4%

Example Pension Income drawdown illustration

The figures below show the annuity income forecasts at age 75.

There is a 5% chance of exceeding the upside amount but a 5% chance of having less than the downside amount.

In terms of your investment goals at age 75:

• You have a 31% chance of purchasing an annuity income of £39,255 a year, this means there is a 69% chance the annuity income purchased is less than £39,255 per year.
• There is a 34% risk that your income falls below £30,000 a year - the minimum level of income you require - at some point in the future.

The annuity incomes have no allowance for future inflation.