Actuaries set 3.5% as safe drawdown rate

Actuaries set 3.5% as safe drawdown rate

The Institute and Faculty of Actuaries has set 3.5 per cent as the drawdown rate individuals should use if they want to have enough money through retirement.

In a policy paper published on Wednesday (25 April) the trade body stated the two main factors to help provide a sustainable income for savers are the age consumers start drawdown and the rate they withdraw their savings.

The paper stated: “We found that a consumer in normal health who enters drawdown at age 65 has a high likelihood of generating a sustainable income if they withdraw 3.5 per cent per annum i.e. equivalent to £3,500 from a £100,000 pot.”

Historically, the pensions industry has been following the "4 per cent rule" - first devised by US adviser William Bengen in 1994 – which is no longer appropriate, according to the institute's modelling.

The appropriate rate to withdraw funds falls to 3 per cent if the individual starts drawdown at 55 – the eligible age to access pension freedoms, the institute stated.

For example, if someone has a £100,000 defined contribution (DC) pension pot and they access it from the age of 55, rather than from 65 (the current state pension age for males), it would reduce their sustainable level of annual income from £3,500 to £3,000 a year.

According to Steven Cameron, pensions director at Aegon, "it is useful to have a professional body like the institute informing the debate on sustainable income levels.

"We agree that as rule of thumb 4 per cent is overly optimistic for everyone. 

"However, the actual sustainable income on an individual level depends on age, gender, life expectancy and investments, and therefore we would always recommend that people seek advice before deciding on their drawdown level."

Aegon has previously proposed drawdown rates on a sliding scale of between 1.7 per cent to 3.6 per cent a year, depending on the risk profile and time period.

Richard Parkin, previously head of pensions policy at Fidelity International and now an independent consultant, argued that drawdown is not guaranteed income, and so it should stop being used as such.

He said: "If we insist on taking the same income regardless of market conditions we inevitably have to set a low rate, in this case 3.5 per cent.

"While that gives a high probability of not running out of money it means most people will leave a significant amount of money behind on death.

"Much better to take a higher level of income and adjust as markets develop. If they go down we take less, if they go up we take more.

"This means that we get more from our pots and so enjoy the retirement we saved for."

According to John Taylor, incoming president-elect of the Institute and Faculty of Actuaries, many more consumers are moving towards products that don't offer any income guarantee.

He said: "There is a real concern that these consumers may be at risk of running out of money in retirement and that they do not understand this risk because of a failure to take regulated financial advice."