Your income drawdown plan: A reminder of your options
While annuities offer a lifetime-guaranteed income, the income they provide is often less than many people want.
Income Drawdown plans provide an attractive alternative with the potential for higher income and death benefits outweighing the limitations of an annuity.
But money in a Drawdown plan is still invested, and there are no guarantees. That means you need to take more care with your money. Below we’ve set out some reminders of what you should be considering.
Almost all areas of life have been affected by the Covid-19 pandemic, and the stock markets and investments are no exception. Markets around the world saw sharp sudden falls in March, and these have since recovered somewhat. While we have confidence that markets will recover and outperform over the long term, the short term (by short term we mean 1-5 years) is far less predictable.
Your drawdown plan will be affected to a degree by these stock market moves. However, in almost all cases the effect on your plan will be significantly less than the headlines might suggest. Most of our drawdown clients err on the cautious side when it comes to investing. Because we recommend investment solutions to suit you, most plans will be insulated from the worst of the recent market volatility.
We have written to all our drawdown clients to remind them of three things,
- What your plan is for
- How your plan could be affected
- Options to protect your plan and income
- Other things you can consider
- What we believe
The most important thing to remember is that we are always available to discuss your plan and your circumstances.
1. What your plan is for
Your drawdown plan is designed to provide you with an income when you are no longer working. How much income you need to take from your plan will depend upon a combination of your needs (to make sure essential bills are paid) and your wants (your discretionary spending).
Every withdrawal reduces the value of your plan. Conversely, positive investment returns will increase the value of your plan.
In an ideal world, investment growth will always exceed your income and so your plan will increase in value over time. In reality, what actually happens depends on your fund value, how much income you take, the investment return and so on.
The actual effect on your plan will depend on your personal circumstances.
2. How your plan could be affected
Of course, returns over the last few weeks have been very volatile, and the combination of income withdrawals plus a falling stock market will reduce your plan value faster than normal.
It’s also important to take a broader view and not only look at the last few weeks. The long term matters more than the short term. Even now, in the middle of the market volatility, we are still seeing some annual client reviews show an increase in fund values over the last year. They have not been immune to the pandemic’s effect on the stock market, but they are still positive returns.
Investing is a long-term process, one we measure in years or decades. In investment terms, a timescale of a few weeks is nothing.
3. Options to protect your plan and income
The priority is to make sure you have enough income to pay your bills. Sometimes that means taking as much income as you can. It may also mean you are taking more than you need.
It’s important – actually it’s essential – to understand your budget. What do you need to spend money on? What bills simply must be paid each month. What can you do without?
Separating your expenses into essential (your needs) and discretionary (your wants) is the first step to ensure you are taking the right amount of income for you.
If you would like to discuss your budget and needs please call on 020 8559 2111. We can go into as much or as little detail as you like.
Whatever you decide about your income, there’s two more things you can consider which could help protect your investment fund over the long term.
- Do you need to maintain the full level of income you are currently taking? Can you afford to reduce it temporarily, perhaps for three to six months? You will always be able to restore to previous levels at any time. If you have other cash savings you can draw from in the meantime this is well worth considering. Doing this will protect your plan value over the long term as you are putting less stress on it in the short term.
- Could we switch part of your plan into cash, and use this to pay your income in the short term? (Three to six months.) This can be done within your plan and has no additional tax consequences. This could protect your plan in case investments become more volatile in the short term.
If you want to have a chat about which option could help you and why, give us a call.
If you think neither option is right for you but want to ask us about something else, give us a call.
4. Other things you can consider
Your income drawdown plan is intended to provide you with an income.
Modern drawdown plans are extremely flexible and allow you to make withdrawals as often and as much as you like until the funds are exhausted.
Older style plans (capped drawdown) limit the income you can take each year.
You have the right to convert your capped drawdown to a flexible drawdown if you choose. This may be as simple as completing a form. Some providers are less flexible than others, so in some cases you might need to move your funds to a new plan. Exactly how it works will vary according to your current provider, and we can advise you on the right solution for you.
Moving from a capped to a flexible drawdown plan gives you more options, but it also comes with some new limitations, for example the amount you are allowed to pay into a pension in future.
If this option appeals to you let us know. We can discuss this with your further, and provide you with a full report explaining all the risks and benefits as they apply to your circumstances, so you can make an informed decision.
We may charge for this report.
5. What we believe
It remains our opinion that reacting to news headlines in the short term rarely results in good outcomes.
Financial planning should be careful, thoughtful and entirely unexciting. (Yes, it’s not much of a sales pitch but we’ve been doing this for over 40 years and we’ve seen plenty of market crashes in this time.)
That doesn’t mean we want to ignore the news altogether, but it does mean that we take a measured approach to what is happening, and we avoid reacting too quickly.
It’s a world away from the ‘Buy! Sell! Buy! Sell!’ approach you will have seen on the news, films and TV, and other financial websites. We are in the business of financial planning, not get rich quick schemes.
Good planning takes time to understand, time to set up correctly, and time to see the rewards.
It means that good opportunities may sometimes pass us by, but it also means that we have a better chance of avoiding the bad opportunities too.
What you should do now
Any or all of the options discussed above could be helpful in protecting your income and your fund over the long term.
Talk to your adviser about what options might be right for you. We’d love to hear from you, especially if we haven’t spoke in some time.
If you’re not already a client of ours and you want to discuss your situation, or other existing plans and investments you have please don’t hesitate to get in touch. There’s a lot of fear, uncertainty and doubt out there.
If you want to talk to experienced, qualified and experienced professionals who can help, please call on 020 8559 2111, or email us at email@example.com
It costs nothing to talk. It could be just what you need.