Recession, Inflation, War, Energy Crisis, Rising Interest Rates - should I stop or reduce drawdown?

thriftytracey

Hi

I have an income release pension product with Royal London (Governed Retirement Income Portfolio 3) from which I take a monthly drawdown (from tax free fund £350 and non tax free fund £750).  

Fund Value Comparison

November 2021  £314,532.00

August 2022       £296,041.00

During the Pandemic I did stop drawing down income for a six month period and a three month period.  

I am wondering if there could now be a long period of falling values. To pre-empt the "crystal ball" comment I just wanted to gauge opinion.  Whether I should stop altogether or reduce, perhaps just taking the cash free element and making up the difference with savings.

I list below the funds - Cautious Risk Profile

Fund Manager	Fund Name	Units	Price (p)	Value (£)	Includes Protected Rights (£)

Royal London	RLP Sterling Extra Yield Bond		7613.319	244.00	18576.50	0.00
Royal London	RLP Global Managed		5387.425	1570.40	84604.12	0.00
Royal London	RLP Short Term Fixed Income		23530.281	93.30	21953.75	0.00
Royal London	RLP Property		1594.982	1336.80	21321.72	0.00
Royal London	RLP Deposit		3299.127	452.60	14931.85	0.00
Royal London	RLP Medium (10yr) Gilt		17976.541	190.70	34281.26	0.00
Royal London	RLP Medium (10yr) Corporate Bond		13260.887	212.80	28219.17	0.00
Royal London	RLP Medium (10yr) Index Linked		12907.534	207.00	26718.60	0.00
Royal London	RLP Global High Yield Bond		11644.926	122.90	14311.61	0.00
Royal London	RLP Short Duration Global High Yield		2739.320	114.40	3133.78	0.00
Royal London	RLP Commodity		10256.365	144.60	14830.70	0.00
Royal London	RLP Absolute Return Government Bond		13836.435	95.10	13158.45	0.00

Current Total Fund Value	£ 296,041.51
Includes Profit Share	£ 1,330.99

Apologies re formatting.

dunstonh

What other earnings do you have?
Are you drawing more than you spend?
What cash management/float/rainy day fund do you have?

The general rule of thumb is not to draw any more than you need unless there is justification for doing so.   If you can turn it on or off as needed, is that because of your drawdown strategy that allows cash floats to be used in negative periods.   Or is it because you don't need the income?

thriftytracey

Thanks for your input.

dunstonh said:

What other earnings do you have?  None, however my husband receives a final salary pension income and state pension.  In addition he also draws down a smaller amount from a similar RL product.  I can definitely afford to stop that one.  
Are you drawing more than you spend? Not really, varies from month to month however inflation reducing any small surplus
What cash management/float/rainy day fund do you have?  I have an "emergency fund" which would cover me for about six months plus we are still able to save into a Marcus account from husband's income.  During the pandemic when I stopped the drawdown I used the £700 monthly saving instead, although it was tight.  We have modest cash ISA's but I am reluctant to use the cash from them.

The general rule of thumb is not to draw any more than you need unless there is justification for doing so.   If you can turn it on or off as needed, is that because of your drawdown strategy that allows cash floats to be used in negative periods.   Or is it because you don't need the income?  Last time I stopped drawing down on my product was because the fund lost £23k value in first couple of months as below:-

15/05/2020	£271,964.00	-23,889.00	-8.07%
22/05/2020	£276,972.00	5,008.00	1.84%
28/05/2020	£279,260.00	2,288.00	0.83%
04/06/2020	£281,250.00	1,990.00	0.71%
11/06/2020	£283,138.00	1,888.00	0.67%
18/06/2020	£283,341.00	203.00	0.07%
25/06/2020	£282,329.00	-1,012.00	-0.36%
02/07/2020	£282,099.00	-230.00	-0.08%
09/07/2020	£284,531.00	2,432.00	0.86%

Of course no-one knew how long it would last, luckily it recovered fairly quickly other than the usual cyclical changes and the best it has been is

12/11/2021

£314,532.00

However, although the pandemic has eased for now, the forecasts currently seem worse.

dunstonh

What other earnings do you have?  None, however my husband receives a final salary pension income and state pension.  In addition he also draws down a smaller amount from a similar RL product.  I can definitely afford to stop that one.  

So, there could be better tax planning here by actually drawing more from the pension and putting the excess back into the pension to get tax relief again (up to £3600) with anything above that going into an S&S ISA.

You could reduce your husbands draw as drawing from yours is more tax efficient than drawing from his.

What cash management/float/rainy day fund do you have?  I have an "emergency fund" which would cover me for about six months plus we are still able to save into a Marcus account from husband's income.  During the pandemic when I stopped the drawdown I used the £700 monthly saving instead, although it was tight.  We have modest cash ISA's but I am reluctant to use the cash from them.

Views will vary but I like around 36 months worth of cash held.  That way you don't need to sell units during a negative period (and 3 years would cover 90% of negative periods).    This can be held inside of the Pension (RL have a cash float function) or it can be held externally in cash savings.

Albermarle

The first obvious comment is that you have what would normally be a low risk portfolio, made up mainly of bonds/gilts/fixed interest etc. Normally when the news is bad and stock markets are down, these types of portfolio normally hold up well.
However with the rise in inflation and interest rates from historic lows, these types of investments have suffered as well. At least they now seem to be stabilising.
To be honest it would not normally be recommended to have such a cautious one sided portfolio for drawdown. Normally it would have a significant % of equities /shares. Did someone advise you to pick this ?

Otherwise I notice you are taking a £750 a month of taxable income. Are you actually paying tax on this? If not then every time you stop payments you are wasting some of your tax personal allowance.

ader42

It sounds like you are roughly following the 4% rule, invested cautiously as your primary intent is keeping an income going for 20 years or more and less concerned with trying for growth or leaving an inheritance with this pot?

If so your current pot would likely last you 20 years with no growth (or increase of withdrawals due to inflation) and perhaps a small amount of growth will still result in you having an inheritance to leave. It’s fairly easy to get scared of recession talk etc. - but remember the average recession only lasts around a year. My pension pot value (100% shares) fell by 25% earlier this year but is back more than half way up to it’s former value already. 

It looks like the cautious profile is working for you as the drop is not as great as it would have been with a riskier profile.

Personally I intend to take more income in my early years of retirement and less later on when the state pension kicks in. I can’t for example see me wanting to do lots of travelling or driving a posh car after I’m 75 and I’d rather take more out early on and be able to help my son out sooner - even if it’s only putting money in a SIPP for him.

I will never take enough to pay 40% tax on any of it, and will have a 2 year savings buffer so I can pause drawdown in years of negative growth, but I won’t be following a cautious approach as I hope to leave a significant pension inheritance. 

thriftytracey

Albermarle said:

The first obvious comment is that you have what would normally be a low risk portfolio, made up mainly of bonds/gilts/fixed interest etc. Normally when the news is bad and stock markets are down, these types of portfolio normally hold up well.
However with the rise in inflation and interest rates from historic lows, these types of investments have suffered as well. At least they now seem to be stabilising.
To be honest it would not normally be recommended to have such a cautious one sided portfolio for drawdown. Normally it would have a significant % of equities /shares. Did someone advise you to pick this ?

Otherwise I notice you are taking a £750 a month of taxable income. Are you actually paying tax on this? If not then every time you stop payments you are wasting some of your tax personal allowance.

Hi Albermarle

I am not sure they are stabilising?

November 2021  £314,532.00

August 2022       £296,041.00

That's a reduction of £18,491.Or do you mean the financial markets in general are stabilising?  I did a risk profile via an IFA and I don't believe I have changed in my attitude to risk.  Yes, if was via an IFA.  I also wanted low fees which was another factor to consider.

I don't pay tax.  I have transferred my allowance to my husband.

Albermarle

It looks like the cautious profile is working for you as the drop is not as great as it would have been with a riskier profile.

The portfolio has dropped 6% over the period. That would also be pretty typical of a more conventional medium risk drawdown portfolio over the same period, with say 50/60% equities, helped by some significant recovery in share prices in July. 

What I would say is that we have had some posters on the forum with cautious/bond heavy portfolios complaining of 20%+ losses, so at 6% the OP's portfolio has survived quite well. 

In the long run though, I am pretty sure a more balanced portfolio would produce a better result.

thriftytracey

ader42 said:

It sounds like you are roughly following the 4% rule, invested cautiously as your primary intent is keeping an income going for 20 years or more and less concerned with trying for growth or leaving an inheritance with this pot?

If so your current pot would likely last you 20 years with no growth (or increase of withdrawals due to inflation) and perhaps a small amount of growth will still result in you having an inheritance to leave. It’s fairly easy to get scared of recession talk etc. - but remember the average recession only lasts around a year. My pension pot value (100% shares) fell by 25% earlier this year but is back more than half way up to it’s former value already. 

It looks like the cautious profile is working for you as the drop is not as great as it would have been with a riskier profile.

Personally I intend to take more income in my early years of retirement and less later on when the state pension kicks in. I can’t for example see me wanting to do lots of travelling or driving a posh car after I’m 75 and I’d rather take more out early on and be able to help my son out sooner - even if it’s only putting money in a SIPP for him.

I will never take enough to pay 40% tax on any of it, and will have a 2 year savings buffer so I can pause drawdown in years of negative growth, but I won’t be following a cautious approach as I hope to leave a significant pension inheritance. 

I don't need to leave an inheritance so not concerned about that.  As yourself and Dunstonh have commented a two or three year buffer of savings is essential (as I have learned to my cost!).  I retire and nine months later the Pandemic, a short hiatus and now very gloomy forecasts, "worse than previous recessions"....

michaels

ader42 said:

It sounds like you are roughly following the 4% rule, invested cautiously as your primary intent is keeping an income going for 20 years or more and less concerned with trying for growth or leaving an inheritance with this pot?

If so your current pot would likely last you 20 years with no growth (or increase of withdrawals due to inflation) and perhaps a small amount of growth will still result in you having an inheritance to leave. It’s fairly easy to get scared of recession talk etc. - but remember the average recession only lasts around a year. My pension pot value (100% shares) fell by 25% earlier this year but is back more than half way up to it’s former value already. 

It looks like the cautious profile is working for you as the drop is not as great as it would have been with a riskier profile.

Personally I intend to take more income in my early years of retirement and less later on when the state pension kicks in. I can’t for example see me wanting to do lots of travelling or driving a posh car after I’m 75 and I’d rather take more out early on and be able to help my son out sooner - even if it’s only putting money in a SIPP for him.

I will never take enough to pay 40% tax on any of it, and will have a 2 year savings buffer so I can pause drawdown in years of negative growth, but I won’t be following a cautious approach as I hope to leave a significant pension inheritance. 

Surely you would never stop drawing down below the point where you have unused personal tax allowance, even if you simply drawdown and put back into the same funds in an isa. Otherwise you are just choosing to pay more tax than you need to.

coyrls

Unless you define some objective criteria for when you will draw from your cash buffer, you will be continually asking if it's the right time to start doing so.  Your portfolio will drop multiple times over your retirement.  I am not aware of any literature that will help you to define your criteria.  There have been multiple "Safe" Withdrawal Rate studies and subsequent refinements but I am not aware of any cash buffer studies that are going to help you.