Concerns raised about sustainable drawdown rules

Concerns raised about sustainable drawdown rules

Advisers have warned against a "one size fits all" approach towards calculating drawdown rates.

Historically the pensions industry has been following the "4 per cent rule" devised by US adviser William Bengen in 1994.

But last month the Institute and Faculty of Actuaries (IFoA) published a more conservative view, setting 3.5 per cent as the drawdown rate to provide a sustainable income.

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According to the modelling, 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 a year, the equivalent to £3,500 from a £100,000 pot.

William Burrows, retirement director at Better Retirement, said the starting point for most people would be the conventional 4 per cent rule but this be should be tuned down to reflect individual circumstances and prevailing market conditions.

He said: "There are different ways of calculating the safe withdrawal rate and there is not a one size fits all.

"Also don’t forget it is still sensible to use the income from an annuity as benchmark as drawdown investors need to know they make be sacrificing income in order to have flexibility and better death benefits."

Gem Durham, independent financial adviser at Obsidian, said she generally refers the 4 per cent withdrawal rate to her clients.

But she uses cash flow modelling, which will take into account their investments, attitude to risk, and if they plan to make one-off withdrawals.

She added: "Some clients also are happy to erode their drawdown pot as they have guaranteed income to cover their basic expenses plus a bit more, and they want to utilise drawdown to have an exciting time at the beginning of retirement."

After comparing consumers who either bought just a drawdown product or just an annuity with different strategies that combine both, the Institute and Faculty of Actuaries concluded a combination of products is beneficial.

For example, consumers aged 65 could benefit from either using drawdown for five to 10 years and then purchasing an annuity, or combining annuitisation and drawdown for five to 10 years and then fully annuitising, the trade body said.

Steve Carlson, chartered financial planner at Cardiff-based Carlson Wealth Management, said the 3.5 per cent rate proposed by the IFoA was quite conservative, and “will no doubt see many people dying with substantial pension pots".

He said: "It’s a crude ‘rule of thumb’ that assumes retirees will spend the same amount of money every year in retirement and only addresses the risk of running out of money, and not the risk of not spending enough money.

"Most of my clients either want to enjoy the earlier years of retirement and/or help their family when they need it the most. Leaving money locked up in a pension for a future inheritance which could be decades away doesn’t achieve those aims."