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Income structuring in uncertain times

For those that are reliant on their capital assets to provide a regular income, a market correction often brings with it a great number of questions. Almost all investors have seen the value of their investments fall over the recent period as Covid-19 has greatly affected businesses and economies across the globe. Concerns generally around recovery and longer-term growth arise, but for those using these investments to meet their income needs, greater scrutiny needs to be applied.

There are different ways of using the capital to provide clients with an income, be it investing in income producing assets (e.g. dividend paying shares or bonds) or taking capital from investments that has seen growth in their values over time. Both are affected in times of market reductions.

When capital values are lower, the sale of assets to meet fixed income needs increases the overall withdrawal rate, often above what is safe longer term – as an example, a £5,000 per annum income from a £100,000 investment is a withdrawal rate of 5%, whereas in a market crash scenario, a value of £80,000 with the same withdrawal amount of £5,000 increases to 6.25%. This higher reduction also affects the recover of the investment to previous values as it needs to grow an additional amount to reflect the increased withdrawal rate. Income assets generally see uncertainty and reductions in dividend rates and capital value fluctuations based on the value and security of the income they pay.

Clients could simply reduce the amount of income they are taking, though in many circumstances this will not be palatable or possible, though given we are all stuck at home, most will probably see spending reduce. In most cases though, this isn’t the most desirable outcome.

As part of our advice process we try to give consideration to the impact of a market downturn. Usually we advocate holding a decent savings buffer that could be relied on to potentially supplement income in times of uncertainty or, as often happens, one-off expenditure increases. Holding cash within portfolios is sometimes looked on as a growth reducer and indeed it is, but in certain instances knowing that the recovery is not being impacted is important. Regular reviews help us prioritise when cash may be needed more and keep the balance between cash and investments in the spotlight.

We use cash flow modelling to look at lifetime income requirements and can build in market crash scenarios to stress test the sustainability of someone’s income stream. Knowing that these events occur but that you are able to withstand them financially and that your income will continue across your lifetime provides comfort and reduces anxiety when these times inevitably come around.

You can’t time events like we are experiencing now but you can plan in advance to navigate through them. If you think we can help in any way, please contact one of our advisers, email enquiries@cowgills.co.uk.


The value of investments and income from them may go down. You may not get back the original amount invested.

Wealth Management
Posted by Phil Hart
26th May, 2020
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