Pound Cost Ravaging question

smjxm09

Pound Cost Ravaging is where someone takes out more income than is being generated by investments so part of that investment has to be sold to maintain the income so compounding the problem.
I have two principle investments. A Fidelity Multi Asset Income Fund which is a fund of many funds for diversity. It has a daily unit price that goes up and down but each unit bought generates a variable monthly income which I am happy with. With my limited knowledge this fund can’t suffer from Pound Cost Ravaging as I just earns the natural yield while maintaining the units as long as I pay the fees separately otherwise units are sold to cover the cost.
The other investment was sold to me by a financial advisor and that is a smoothed Prudential Cautious Fund that is also a multi asset fund that is linked to a life insurance policy that pays out something like 100.1% on death.

Now this fund works differently. Growth comes from the unit price rising and income is generated by selling units. So if the units are rising by say 4% per year and I want an income of 3% I sell 3% of the units so while I end up with less units the remaining units have gone up by 4%. This means I end up with a gain of 1% in value and 3% income.   As it is a smoothed fund the growth line is predictable until there is a price reset. This happened last March when the units dropped in value by I think 9.7%. Since then the line follows its normal path with a few more resets but in an upward direction.
Now the question. If I reset my 3% income to the lower price points would this be Pound Cost Ravaging? I actually stopped taking income when it dropped but now the unit price has recovered I have requested income again. If I took 3% income from the lower price point I would now have less value than I invested due to the income taken out so is this Pound Cost Ravaging or is it not as the line was still growing at around 4% but from a lower point?

Linton

But 3% at the lower price point is a smaller amount of money than 3% at the previous price point so it all works out the same reduced by 9.7%.  The prices are 9.7% lower but so is your income and so is the annual 4% growth in absolute terms.  Or have I missed something?

smjxm09

No you haven't missed a thing except if I had taken a revised lower income last year today's value would be less than the initial investment despite the price point being reset so is this an example of Pound Cost Ravishing?

The growth chart can be seen here https://www.trustnet.com/factsheets/n/fpa6/pru-prufund-cautious-fund-s5

Linton

As long as you continue taking a lower % than the return after charges and wait for the price to recover if there is a fall you wont be pound cost ravaging.  Pound cost ravaging comes from blindly taking a steady income during falls which leads to decreases in the core investment needed to support future withdrawals.

Your main long term problem would be inflation.  WIth 4% return and 3% withdrawals only 1%  minus any extra charges taken from the pot is going into increasing the size of your pot which will probably not match inflation.  Therefore your 3% will lose value in real terms.

smjxm09

Thank you for both your answers.  I am in a dilemma.  The wife and I have 3 Pru Cautious funds. Two are rapped up in ISA's while the other is a joint fund.  Despite the joint fund not being in an ISA it is not subject to tax if we take no more than 5% in income over  20 years.  All three are tied to life insurance policies that pays 100.1% of their value on death.  Now the joint fund costs 0.95% in fees due to the fund having more than £100,000 in it while the ISA version does not pick up any discounts so we are each paying 1.25% which bugs me. The good thing about the 3 Pru policies is that as they are tied into life assurance as since taking them out I have read  they can't be grabbed for care home fees, which needs to be considered. 

I was thinking about transferring one of the Pru ISA's over to one of our Fidelity Multi Asset Income Funds, which are also ISA's but as I would get the natural yield, over time would this be protected by inflation as would the yield would increase with inflation?  I am not too concerned about the unit price but just the income generated.   

Thrugelmir

smjxm09 said:

I was thinking about transferring one of the Pru ISA's over to one of our Fidelity Multi Asset Income Funds, which are also ISA's but as I would get the natural yield, over time would this be protected by inflation as would the yield would increase with inflation?  

The underlying assets would need to be those that benefit from inflation. Fixed coupon interest stocks by their very nature will fail to maintain their buying power. 

TheAble

It does sound rather confusing I agree...
Think I'll be sticking to my index trackers!

coyrls

Generally, Pound Cost Ravaging refers to sustained multi-year investment losses that coincide with an income being taken from the investments, it has nothing to do with dividends not covering withdrawals.

Linton

I am an advocate of smoothed funds as being appropriate for those people with a small-ish pension pot and minimal understanding of investments unused to dealing with large amounts of money who want something simple that will provide them with a pretty steady but modest income.  The OP stopping drawdown when the price falls significantly could be the maximum amount of management that should be required.   I guess that most such people would consider simplicity and lack of volatility to be far more important than maximising long term returns.

smjxm09

I am 63 with a final salary pension which is gold that I have been drawing since 60..  This pension covers CPI inflation rises so I am not overly bothered if investments don't keep up.   The important thing is that I am not overly exposed to risk which for me means a large exposure to shares.  When I stopped taking income from the Pru it was costing me around £450 a month but that £450 helped bring the total back to beyond where it was helped by upward price resets.   Fidelity just kept paying out regardless of a sharp drop in the unit price that has now almost recovered.  

To be honest I prefer the Fidelity investment to the Pru.  Fidelity can just be left alone while the Pru needs to be watched. The non ISA version is set for 3% of its value paid out each year in monthly instalments but the ISA version is not an on-line account so I have to wait for statements to see what is happening and I have to decide a fixed income from both ISA's as I can't take 3% of its value each year.  Also the ISA's are managed by Link Asset Services so it is a different procedure, different phone numbers and different forms. 

The ISA's have higher costs and fees which is why I was considering moving one of them over and into Fidelity.

Thrugelmir

smjxm09 said:

 Fidelity just kept paying out regardless of a sharp drop in the unit price that has now almost recovered.  

If you are not heavily invested in equities. What's generating the high level of income ?