Natural yield, whereby savers take only the income produced by their investments, is an “attractive” and “sustainable” way to draw down pension income, Hargreaves Lansdown has said.

New research from Hargreaves Lansdown has highlighted that natural yield from the average IA UK equity income sector is an “attractive alternative”, generating £4,180 with a range of 2.72 per cent to 7.03 per cent from a £100,000 pension pot. Alternatively, a natural yield FTSE All Share option would produce an income of £3,620, statistics published by Bloomberg on 19 October 2017 shows.

Natural yield was credited as a sustainable drawdown option as users are unable to “nibble away” at their capital with the stock market falls, which is where retirees risk running out of money in retirement.

Furthermore, analysis of returns from the FTSE All Share showed that based on a £100,000 pension pot with income commencing 1 January 2000, drawing 5 per cent every year would leave retirees with less than half of their pot left.

If individuals were to draw six per cent per year, they would run out of money before 2020 and a seven per cent yearly drawdown would have meant that the £100,000 pot ran out in 2014. Comparatively, however, drawing the natural yield means that both income and capital have grown.

“The reason natural yield is so effective, is that whilst dividends can fluctuate they are far less volatile than share prices, provided you have a diversified portfolio,” Hargreaves Lansdown said.

Nonetheless, Hargreaves Lansdown also noted that where people do not have large enough pension pots to generate a desired level of income from natural yield, annuities can provide a higher income. A single life, level annuity at 65 with a five year guarantee can generate an income of £5,209 from a £100,000 pension, while a single life, RPI linked annuity at 65 with a five year guarantee would result in £3,242 from the same pot, the firm explained.

“In the same way that most people can benefit from a diversified portfolio when building up their pension, they can also benefit from diversification when drawing from their pension. Using your pension pot to buy some annuity for an instant boost to income with natural yield from drawdown from the remainder can be an excellent choice,” the report stated.

In addition, Hargreaves Lansdown also explained that using a tax free lump sum in retirement could also be a useful strategy to top up income from natural yield.

Hargreaves Lansdown senior pension analyst Nathan Long commented: “Low annuity rates have seen retirees turn their back on secure income, instead the industry has seen a preference for a ‘capital nibbling’ approach where investors regularly sell their investments to fund their retirement income. This approach can work in strong stock market conditions such as those experienced following the introduction of the pension freedoms, but you do not want to be a forced seller of investments when the market falls.

“The alternative to capital nibbling is drawing the natural yield which is a sustainable way of drawing from your pension where you take only the income produced by your investments. This is effective because whilst dividends can fluctuate they are far less volatile than share prices as they are driven by company fundamentals as opposed to sentiment. From the turn of the millennium, being invested in the FTSE All Share would twice have lost over a third of your pension value in a 12 month period. However, the level of income received was far more robust materially falling only once from one calendar year to the next.

“With plenty of equity income funds yielding over £4,000 for £100,000 invested, this is an option which could suit many people who do not want to buy secure income.”

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