However, the reality right now, based on the Financial Conduct Authority’s latest numbers, is that the average withdrawal rate from drawdown pots has increased from 4.7 per cent in 2016-17 to 5.9 per cent in 2017-18. More positively, the average pot entering drawdown has risen from £105,000 to £123,000 over the last year.
If financial discipline and over-drawing down is a real concern, advisers might want to consider putting a large percentage of pensions savings into an annuity at the start of retirement.
Ideally, within your client’s drawdown policy, there is scope to leave a target amount for inheritance purposes as well.
An adviser can help you navigate these tricky decisions, determining how much you need to live on, how much of a lifestyle cushion you feel comfortable with and how much you would like to leave for your family, charities and others.
Tools and apps
Advisers now have access to some pretty sophisticated tools to help ensure your drawdown policy does not run out of funds early. FinalytiQ’s Timeline App is one such ‘sustainable withdrawal rate’ calculator, which has a strong following in the adviser market.
Do not tell the FCA – which believes that past performance is no guide to the future.
However, the Timeline App uses masses of historical data to predict what your percentage likelihood is of running out of money is – given pot size, retirement date, health and income level – you are looking to take annually.
Advisers also need to be aware that clients tend to want greater income certainty as they get older and the prospects of going back to work to top up income shortfalls recedes.
We also now know that, as we get older, our cognitive abilities diminish. Frankly, we are more likely to make poor financial choices without realising that we are exposing ourselves to greater risk as we get older. We are more vulnerable to pensions ‘liberation’ scams for example.
It is also a well-known fact that in later retirement, perhaps over the age of 85 today, retirement income needs tend to level off and begin to reduce - perhaps as mobility issues begin to play a factor in holiday plans for example.
In later life, clients do not want to fret about the price of their weekly shop, or indeed the state of the prospects for their FTSE 100 or Nikkei shares.