Aegon debunks 4% income rule

Aegon debunks 4% income rule

Changes in life expectancy and economic conditions have made previous retirement income “rules of thumb” obsolete, according to an Aegon report.

The report stated that the "4 per cent rule”, developed by US adviser William Bengen in 1994, has become outdated, and determined that one in five people would run out of money in 30 years by following the rule.

A joint venture between Aegon and actuarial firm EValue, the report tested a sliding scale of between 1.7 per cent and 3.6 per cent when determining retirement income, which takes into account risk profile, time period, life expectancy, risk appetite, and investment strategy.

Over half a million people have decided to withdraw a total of £9.2bn worth of saving since the pension freedoms took effect in April 2015, leading many to pursue new avenues for retirement income.

Aegon pensions director Steven Cameron called retirement planning “too complex to be boiled down to a rule of thumb”, and added that the previous 4 per cent notion was created at a time when interest rates were significantly higher.

“Of course, income levels should be reviewed regularly to reflect changes in both personal circumstances and the wider economic environment. Advisers have the opportunity to add true value both at and in retirement, protecting and enhancing their client’s outcomes.”

Jeannie Boyle, technical director and chartered financial planner at EQ Investors, warned not to rely on the 4 per cent rule and to be wary of the impact of markets on savings.

“Those entering drawdown need to be aware of ‘pound cost ravaging’ – when markets fall, more units will need to be sold to provide income payments.  

"But when markets recover, you have fewer units to benefit from the uplift and you risk exhausting the fund and running out of money.”