Experts clash over suitable pension withdrawal rates

Experts clash over suitable pension withdrawal rates

Experts and advisers have clashed over the use of suitable withdrawal rates when determining how much people can take from their pensions without running out of money in retirement, some arguing the concept is flawed.

The problem with using 'safe rates', often considered to be around the 4 per cent mark, was that it was "back-looking", said Alistair Cunningham, chartered financial planner at Wingate Financial Planning.

He said cashflow planning was a more suitable way of dealing with the issue.

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Speaking at The Great Pensions Debate in Port Talbot today (10 July), he said: "The average life expectancy 30 years ago was 10 years different from what it is today.

“The danger of the sustainable withdrawal rate approach is that it is entirely back-looking.

“We could have some sort significant medical shift where we could repair any part of the body. I'm not saying that it is likely, but isn't that a risk that we should be underwriting?"

Fiona Tait, technical director at Intelligent Pensions, said some individuals currently in their 50s are expected to live to 150, and some of their children could reach the age of 200.

She said: “We need to look at what is relevant for each individual client, and we can't get away from the fact mortality is one of the key issues for ongoing cashflow planning.”

But Abraham Okusanya, founder of financial services consultancy to advisers Finalytiq, defended the use of suitable withdrawal rates.

Mr Okusanya created Timeline in 2017, which uses empirical research, asset class returns, inflation and mortality data to assess how a retirement strategy might fare under various market conditions.

He said: “If we had an environment where people lived until they are 150 years old, the annuity industry would go bust.

“There would be a massive problem, defined benefit pensions would be in an incredible precarious situation, because their underlying assets are secured by the capital market.

“If I'm invested in drawdown, I'm invested in the capital market. I would be investing in the company that made the medical innovation [that Mr Cunningham mentioned].”

Richard Gough, financial planning technical specialist at Create Wealth Management, argued the answer to the problem lay in blending ideas and methods to get the best outcome for a client.

He said: “If this longevity goes horribly wrong, and we jump from a 60-year old having a 20-year life expectancy to 40 years, it isn’t going to be the people in drawdown that are the only ones that are going to suffer.

“Everybody that is going to suffer, the DB schemes will find out that they are 50 per cent funded, and there will be no money.”