INCOMING PLANNING MADE EASIER

A guide to our income planning tool

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THIS IS FOR FINANCIAL ADVISER USE ONLY AND SHOULDN’T BE RELIED UPON BY ANY OTHER PERSON.

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CONTENTS

Getting started 3

How the tool works 4

Step 1: Enter client information 7

Step 2: Assess client risk 10

Step 3: Review information 15

Professional client reports 21

Benefits for you and your clients 22

Summary 23

INCOME DRAWDOWN CHALLENGE

More people are using income drawdown than ever before. However, income drawdown is not without its risks. So planning and controlling the risks to your client’s income is critical to delivering the best outcomes.

We understand that planning a sustainable income and choosing a suitable investment for your clients can be both time-consuming and costly for your business.

This guide tells you how our income planning tool will help you plan a sustainable income for your clients in a cost effective way.

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GETTING STARTED

The income planning tool is designed to help you choose a suitable investment option and explain the risks of income drawdown to your clients. It’s really easy as it sits with the rest of the Royal London tools. Simply log in to online service at adviser.royallondon.com and select the income planning tool. Here’s a quick outline of how our income planning tool works.

STEP 1 STEP 2 STEP 3

ENTER CLIENT INFORMATION

ASSESS ATTITUDE

TO RISK

REVIEW RESULTS

The first stage is to enter general information about your client.

You’ll then need to understand your client’s attitude to risk and capacity for loss.

Finally, you’ll need to review the results and make a recommendation to your client.

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The first screen you’ll see when you access the tool is the home screen. The tool is split into three sections. You must complete each section in order.

The income planning tool can be used to help you:

• Assess your client’s attitude to risk and capacity for loss.

• Select an investment option from Royal London’s range of Governed Retirement Income Portfolios (GRIPs) or other investments.

• Select an appropriate level of regular income. • Understand the risks to your client’s future

retirement income and explain these risks to your client.

1. Client details The first section is the client details section. This is where you enter all the relevant client details and income information.

2. Client risk assessment This section will help you assess your clients’ capacity for loss and attitude to risk. This section is optional. You can skip this section by answering no to all options.

3. ResultsThe final section is where you can view the results and alter investments to create a client report.

You can use the tool when your client is:

• between the ages of 55 and 99, and • they’re considering using Income Release

to provide some or all of their regular income in the near future.

The income planning tool isn’t suitable for clients who aren’t going to take a regular income from their plan for some time.

HOW THETOOL WORKS

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Stochastic modelThe income planning tool uses a stochastic model to calculate 1,000 different economic scenarios, giving you a better indication of whether or not they’re likely to meet their target income.

The stochastic model we use is provided by Moody’s Analytics, who regularly review this model and are known experts in this field. This is the same stochastic model used in our drawdown governance service.

The model is designed to provide an outlook on income sustainability by looking at the following factors:

• Investment performance outlook – the outlook for the performance of key investment types and portfolios.

• Macro-economic outlook – the outlook for key economic factors which can have an impact on a client’s income objectives and outcomes, such as inflation, interest rates and longevity.

Target optionsClients can choose from two target options:

• Income for life – when a client takes a level income via drawdown until their target age and then buys an annuity that’s at least as high as their target income.

• Income to age – when a client takes a level income via drawdown until their target age. This option is intended to leave their retirement fund empty at their target age.

You can select how long the projection runs for and how likely it is that your client’s income can be sustained. For example, if they target an income for life, the tool can tell you if your client would be able to buy an annuity at that date, given their projected fund value at that date.

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What is sustainability?Income sustainability is the probability that the specified level of income can be sustained to a given term.

If a client chooses income to age, this reflects the probability that they’ll be able to continue withdrawing income at the chosen level until that age.

If a client chooses income for life, this reflects the probability that they’ll have enough money left after withdrawing income to an age to be able to buy an annuity which is at least as high as the income they were taking.

Our assumptionsThe assumptions we use in our tool are updated every quarter to reflect current market conditions. We also make certain assumptions to help us present plan information in a clear and simple way. Here’s more information about our assumptions and what they mean for your clients.

1. Income levelsWe assume that your client withdraws the same amount throughout the projection term. And that no further payments are taken out of your client’s income drawdown plan.

2. Fund-Based ChargesWe assume that your client pays fund-based charges from their pension fund only.

3. TargetThe calculations we use account for the target your client has nominated. For example, income to age 87 or annuity at age 87 (expressed as “Income for life”).

4. InvestmentsYou are able to choose a range of investment options including;

• Governed Retirement Income Portfolio• Governed Portfolio• Target Lifestyle Strategies

5. Other chargesWhen the tool produces a projection, it takes into account annual charges such as AMC and adviser charging throughout the term of the projection.

6. Annuity assumptions The calculations we use for Income for Life assume that the client takes a single life annuity with no guarantee period and that no tax-free cash lump sum is taken.

7. Overall tool accuracy Our tool has been developed with a great deal of diligence and is based on a strong model. However, it’s important to remember that it’s just a model and certain limitations apply.

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The first stage is to enter information about your client.

Begin by entering the client’s personal details. This includes:

• Client name • Date of birth• Target – income for life or income to age• Target age

STEP 1: ENTER CLIENT INFORMATION

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Next, complete information about your client’s existing plan:

• Fund value – this is the amount after tax-free cash.• AMC (annual management charge) – we’ll

use this in the projection. This figure changes automatically depending on the fund value. You can overwrite this manually by entering a value between 0% and 3%.

• Adviser charge – we’ll use this in the projection. This is the yearly amount that will be deducted from your clients’ plan and should be between 0% and 1%.

• Short term forecast – this can be 1, 2 or 3 depending on the age of the client. It will look at the retirement income your client’s plan might be able to secure after 1, 2 or 3 years. This is useful as you can set it to match your next review date

If your client is over age 75, you must select 1 year for the short term forecast.

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Then complete the gross income and contributions section:

• Target income – this is the desired level of income your client would like to withdraw from their plan over a given period. The tool will tell you how likely it is that your client’s future income will meet this target.

• Minimum income – this is the minimum level of income your client needs from the plan in a given period. The tool will tell you how likely it is that your client’s future income will be at least this amount.

• Income frequency – this is the expected frequency of the income payments. This option can help your client understand the money they could expect to get on a monthly, quarterly, half-yearly or yearly basis.

The final section is optional. This is where you can enter information about contributions your client may be making. This includes:

• Regular contributions – this is the assumed amount your client will pay into the Income Release plan regularly over a given period.

• Contribution frequency – this is the expected frequency of contributions that your client will make.

• Contribution escalation type – this can be set to different options depending on your client’s wishes. The contributions can be set to stay level, increase in line with inflation or increase at a specific rate using the Auto option and setting the specific rate.

• Contribution end age – this is the age at which the tool will assume the contributions stop. We won’t accept contributions after age 75.

Once you’ve completed this section, click the save button on the bottom right of the window and the window will close.

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STEP 2: ASSESS

CLIENT RISKOnce you’ve completed the client details section, you can use the client risk assessment section to help you understand your client’s capacity for loss and attitude to risk.

You’ll be presented with two options: Assess capacity for loss and Assess attitude to risk. You can select these options in any order.

Assess capacity for lossBegin by selecting Assess capacity for loss from the home screen. You’ll then be asked two questions:

1. Have you already assessed your client’s capacity for loss?

2. Would you like to complete our capacity for loss questionnaire?

This section of the tool is optional. You can skip this section by answering ‘no’ to question one and ‘no’ to question two. Answering ‘yes’ to the first question allows you to enter some comments regarding your clients capacity for loss. Any comments you enter here will pull through to the client report.

We’ll assume that you haven’t assessed your client’s capacity for loss and you’d like to complete our capacity for loss questionnaire by answering ‘no’ to question one and ‘yes’ to question two.

You can also add in any other information related to your client’s capacity for loss which will pull through to the client report. Once you’re happy, simply select Confirm at the bottom right and this will take you back to the home screen. You must complete the attitude to risk section before you can view the results.

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This is our capacity for loss questionnaire. It’s made up of six questions to help you assess your client’s capacity for loss. Simply indicate the extent to which your client agrees or disagrees with each statement. You should select the middle option if your client has no strong opinion about a particular statement.

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Once you’ve completed the questionnaire, the tool will produce a small summary detailing your client’s capacity for loss. You should consider how well this fits with everything you know about the client and discuss the results with them. You can also add in any other information related to your client’s capacity for loss which will pull through to the client report. Once you’re happy, simply select confirm at the bottom right and this will take you back to the home screen.

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Assess attitude to riskBegin by selecting Assess attitude to risk from the home screen. You’ll then be asked if you’ve already assess your client’s attitude to risk. If you’ve already assessed your client’s attitude to risk, follow these three steps:

1. Answer ‘yes’.

2. Select the tool you used to assess your client’s attitude to risk from the drop-down menu.

3. Select their risk rating from the drop-down menu.

You can also add any comments about your client’s attitude to risk in the comments box.

You can also skip this section altogether by selecting ‘no’ to question one and ‘no’ to question two. If you skip this section, our tool won’t map your client to a specific GRIP but you’ll be able to select different GRIPs from the results screen.

If you haven’t already assessed your client’s attitude to risk, answer ‘no’ to the first question and confirm that you’d like to complete our attitude to risk questionnaire.

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Our attitude to risk questionnaire is a psychometric questionnaire designed to assess the client’s comfort with taking investment risk. It’s made up of twelve statements related to willingness to take investment risk. All of the statements have been tested for relevance and clarity. You can find out more by in our Income drawdown risk profiling questionnaire factsheet.

Similar to our capacity for loss questionnaire, simply indicate the extent to which your client agrees or disagrees with each statement. You should select the middle option if your client has no strong opinion about a particular statement.

Once you’ve completed the questionnaire, the tool will produce a small summary detailing your client’s risk profile. You should consider how well this fits with everything you know about the client and discuss the results with them. You can also add in any other information related to your client’s attitude to risk which will pull through to the client report.

Here’s an example risk summary:

Now that you’ve completed this section, you’ll be able to review the results screen.

You only need to complete this section once. If you want to change any of your client’s details in the future for example, you want to assess different target incomes; you don’t need to complete this section again.

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STEP 3: REVIEW

INFORMATIONThe final stage is to review the client information. The results displayed here will depend on whether your client is targeting an income for life or income to age.

Income for life long term forecast

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1. Highlighted GRIP from risk profile, but you can easily change this selection.

2. There’s a 100% chance this client will receive an income of £3,000 per year, via drawdown, until target age (75) and then buy an annuity of at least £3,000 per year.

3. There’s a 60.1% chance the client will receive £5,000 per year, via drawdown, until target age (75) and then buy an annuity of at least £5,000 per year.

4. Select which investment option you want to use, from the drop down tab, to compare against (optional).

5. Select which forecast you want to view; long-term and short-term forecast.

6. Income sustainability summary showing targeted income level, minimum income level and there corresponding sustainability scores given the investment option selected.

7. Strategic Asset Allocation breakdown of the selected Investment.

8. Click this button to generate a detailed or summary client report. Note: The reports will be produced based on the portfolio which is currently selected and is described within the Income sustainability summary.

9. The graph shows 90% of scenarios where the darkest part of the graph highlights where the majority of the scenarios are. We’ve removed the first 5% and last 5% of the scenarios which we have classed as outliers.

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Income for life short term forecastThe short term forecast assumes that your client will buy an annuity at the end of the short term.

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Income to age long term forecast

1. The purple bars represent the chances of sustaining the minimum level of income whilst the orange bars indicate the chances of sustaining the target level of income.

Note: The size of the bar is representative of the percentage. So given a score of 100%, then the bar would be full and given a score of 50% the bar would then be half the size in comparison.

2. In this example, there’s a 91.4% chance the client will be able to sustain taking their targeted level of income each year until age 85 if they remain invested in GRIP 3.

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Income to age short term forecast

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Compare Investment Options and what this looks like for both targetsIf you wish to add another investment solution to compare against the GRIP or if you’re using an alternative investment solution for drawdown then you can use the tab at the top of the results output to select between different investment options.

Please note that only the GRIPs are purposefully designed for income drawdown.

Below shows what the comparison looks like for both income for life and income to age.

1. This section now displays the graphical results for the selected investment option.

2. This button allows you to switch the Income Sustainability Summary between the GRIP and the investment option that you have selected. Note: the summary box shifts position depending on the investment option being described within.

3. When Target Lifestyle Strategy is selected from the dropdown box at the top of the page, this section will appear allowing you to select the appropriate lifestyle strategy.

Note: To change any details or target income level just close the results window and you can then edit client details. Once the details have been changed you can click save and it will automatically update the results. This allows you too easily play about with different income levels to see what suits your client best.

Once you’re happy with the results and investment option, simply click Create report. This will take you back to the home screen where you can select View report.

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PROFESSIONAL CLIENT REPORTS

You can use our tool to create professional client reports. The reports are written from you to your client, so you can demonstrate the work that you’ve done and the expertise you’re providing.

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YOUR INCOME PLANNING SUMMARYPERSONAL DETAILS

INCOME SUSTAINABILITY SCORE

Name:LongforenameLongsurname

Date of birth:Fund value:Income target:Target income amount:Target age:

1 January 1950£400,000.00Income for life£10,000.00 every year9099.1%

INVESTMENT CHOICEFollowing a review of your circumstances and taking into account the level of income you'd like to take, your current

attitude to risk and the level of loss you're willing to take, I'm recommending that your income drawdown plan is

invested in Governed Portfolio 9. This portfolio provides a balance between the amount of risk you want to take

and the potential returns available.Here's a breakdown of the portfolio:● 45.00% Equity● 10.00% Property● 5.00% Commodities● 2.50% Global High Yield Bond

● 9.16% Gilts (15yr)● 9.17% Index Linked Bonds (15yr)● 9.17% Corporate Bonds (15yr)● 10.00% Absolute return strategies (inc. cash)

RETIREMENT INCOME FORECASTYour objective is to take a regular income from your plan each year until you reach your target age then buy an

annuity. The graph below shows how likely you are to achieving this using the target income levels we discussed.

The graph highlights 2 key points:● The two vertical lines indicate the possibility of you taking your target income levels from your plan and then being

able to buy an annuity which will provide you at least this level of income. The first line shows you have a 100%

chance of achieving a minimum income of £1,000.00, whereas the second line shows you have a 99.1% chance of

achieving your target income of £10,000.00.● The coloured bar is based on my investment recommendation of Governed Portfolio 9 and shows how much

annuity you may be able to buy in the future. The majority of the results fall within the darker shaded area. When

you come to buy your annuity, the amount you'll be able to buy will depend upon a variety of factors and market

conditions at that time. These figures are not guaranteed, but they'll give you an idea of how much annuity you may

be able to buy.

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YOUR INCOME PLANNING SUMMARYPERSONAL DETAILS INCOME SUSTAINABILITY SCOREName: Paul GraemeDate of birth:Fund value:Income target:Target income amount:Target age:

1 January 1960£250,000.00Income to age£15,000.00 every year75

42.5%

INVESTMENT CHOICEFollowing a review of your circumstances and taking into account the level of income you'd like to take, your currentattitude to risk and the level of loss you're willing to take, I'm recommending that your income drawdown plan isinvested in Governed Retirement Income Portfolio 1. This portfolio provides a balance between the amount ofrisk you want to take and the potential returns available.

Here's a breakdown of the portfolio:● 10.00% Equity● 12.50% Corporate Bonds (10yr)● 65.50% Index Linked Bonds (10yr)● 8.50% Sterling Extra Yield Bond● 3.50% Property

RETIREMENT INCOME FORECASTYour objective is to take a regular income from your plan each year until you reach your target age. The chart belowshows how likely you are to achieve this using the minimum and target income levels that we discussed.

Likelihood of achievingminimum income of £10,000.00

Likelihood of achievingtarget income of £15,000.00

The first column shows that if you choose to take a minimum income of £10,000.00 from your plan each year, thatyou'll have a 100% chance of being able to achieve this until age 75. If you do decide to take this level of income thenthere's a 100% chance that when you reach age 75 you'll still have some of your retirement savings left.

The second column shows that if you choose to take a minimum income of £15,000.00 from your plan each year,that you'll have a 42.5% chance of being able to achieve this until you reach age 75. If you do decide to take this levelof income then there's a 42.5% chance that when you reach age 75, you'll still have some of your retirement savingsleft.

You can choose to produce a detailed or summary client report to suit your client’s circumstances.

The reports are pre-filled automatically using the information you’ve already entered into the tool. This includes your client’s risk summary and any comments you’ve added, as well as your recommended investment option.

The report also provides information about the recommended investment option including the investment objectives, strategic asset allocation, the assumptions used and any risks.

You can send the report to clients as it is, or you can edit the report if you want to, or to ensure that it meets your compliance requirements. You can also personalise the report with your company logo.

The report is clear and easy to read and summarises the key information you may want to discuss with your client.

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BENEFITS FOR YOUAND YOUR CLIENTS

• Client understanding Helps your clients understand their attitude to risk and how likely it is that they’ll meet their desired

income target.

• Clear audit trail You can use the tool to evidence the work you’ve carried out. You can also add notes to help meet

your compliance requirements.

• Flexibility You can use the tool along with our drawdown governance service, or on its own, giving you

flexibility on how you use it.

• Cost-effective Our tool provides you access to a sophisticated stochastic model, allowing you to quickly and easily

review your clients sustainability over 1000 potential future economic scenarios.

• Professional client reports You can create unbranded and editable client reports to help you demonstrate the work you’ve done

and the expertise you’re providing.

• Sophisticated stochastic model Our tool is powered by a sophisticated stochastic model, provided by Moody’s Analytics, who are

known experts in this field.

• No extra charge We won’t charge you to use our tool, so you can provide expert advice to your clients cost-effectively.

This tool shouldn’t be considered as Royal London providing a recommendation or giving advice. We won’t be held responsible for any advice or recommendations made on the back of this tool.

SUMMARY

We believe our income planning tool will help make complicated drawdown advice simple.

Our income planning tool will help you:• Assess your client’s attitude to risk and capacity

for loss.

• Select an investment option from Royal London’s range of Governed Retirement Income Portfolios (GRIPs) or other investments.

• Select an appropriate level of regular income.

• Understand the risks to your client’s future retirement income and explain these risks to your client.

And we won’t charge you to use this service.

For a personalised demo of the tool or to find out more, speak to your usual Royal London contact or visit our website at adviser.royallondon.com.

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