Earlier this week, AJ Bell launched its new Retirement Portfolio Service aimed at clients drawing income under pension freedoms.
To avoid sequencing risk, where the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return, the provider designed its new service around the 4 per cent rule.
This rule follows the premise that if someone withdraws 4 per cent of their pension pot in the first year and then adjusts subsequent withdrawals for inflation, they should avoid running out of money for 30 years.
But Philip Wise, a chartered financial planner and retirement income planning director at Informed Choice, said that AJ Bell should have steered away from following the 4 per cent rule due to a number of reasons.
Firstly, the rule was calculated by Bill Bengen, specifically for US retirees and was therefore based on a combination of US factors such as US shares, US bonds and US inflation.
Therefore the assumptions are incorrect for the UK. If UK factors are used, instead of US factors, you come out with a figure of between 3.36 per cent and 3.7 per cent.
The 4 per cent rule also assumes that there are no costs in the portfolio for example pension charges, fund charges and adviser charges.
Mr Wise said: “Even if the US assumptions were right, it would still be over-optimistic. If you take off typical UK charges (about 2 per cent per year), then the US 4 per cent rule comes out at around 2.5 per cent.”
It also assumes that no tax is payable and that retirement last 30 years.
Andrew Elson, a chartered and certified financial planner at Berry & Oak, said that he prefers to let clients be flexible and not fixate on the 4 per cent rule.
Mr Elson said: “Most of our clients don’t want a straight line retirement with the same income every year.
“Instead they usually want to spend more now in the early years of retirement when they are young, healthy and full of ideas, before gradually reducing income requirements over time as they reduce exotic travel, or state pension scheme, or another form of income starts.
“This is why you need proper cash flow planning to test the sustainability of their funds.”
Victor Sacks, an independent financial adviser at VS Associates, said the 4 per cent rule should be explained to clients but ultimately it is the client's decision if they want to follow this.
He said: “There is evidence to suggest that 4 per cent is the sustainable withdrawal rate and I think it's fair to highlight this to a client, however, clients are able to draw what they want, so that has to be illustrated alongside 'caveat emptor' - surely that's where cashflow modelling helps?”
But AJ Bell has highlighted that although its service incorporates the 4 per cent rule advisers still have the flexibility to ignore this if this is not the correct method.
Charlie Musson, spokesperson for AJ Bell, said: "The service has been developed in conjunction with advisers so we know that many of them do use the 4 per cent withdrawal rate as a useful rule of thumb.
"However, the service is not predicated on the 4 per cent rule and naturally it is up to advisers to agree an appropriate withdrawal rate with each of their clients.
"The rebalancing feature means the service accommodates withdrawals of any sensible level.”
amy.austin@ft.com
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