The Coronavirus pandemic has created the 'perfect storm' for those in income drawdown and many may never fully recover from the impact, according to a new report.

The report, from financial information business Defaqto, highlights the key topics Financial Planners should consider during periodic drawdown reviews to ensure sustainable and suitable advice.

The report says sequencing risk means that income drawdown clients may struggle to ever recover from the pandemic financially.

A client may expect a specific income from their drawdown arrangement, but many may not have considered sustainability, the report says.

It is down to the Financial Planner to educate their client on what a sustainable income drawdown rate should be, the report said.

The report identified six key factors that impact sustainability: initial capital balance, withdrawal amount, duration, level of sequence risk, reduction in yield, and residual capital.

The CPD accredited drawdown review guide contains resources Financial Planners can use, including an explanation on sequence risk for clients.

Sequence risk refers to the dangers of timing withdrawals from a pension account. Poorly timed withdrawals, during a bear market or major downturn in markets for example, can be far more costly than the same withdrawals in a bull market. 

David Cartwright, head of insight and consulting (wealth and protection) at Defaqto, said: “Income sustainability is crucial, especially at times of increased volatility. Our guide, produced in partnership with Canada Life, is designed to provide an understanding of the concerns clients may be experiencing in the current climate. It then explains the key steps to consider in a drawdown review, including identifying vulnerable clients.

“Importantly, with our guide, advisers will be assisted to navigate the key aspects of the drawdown review process and further ensure that the advice they give is suitable.”