Advisers are turning their backs on a fixed 4 per cent drawdown rate and instead prefer modelling tools, which have shown their worth during the Covid pandemic, Aegon has said.
Research from the provider, published today (June 10), found that out of 212 advisers, 38 per cent now use modelling tools to find a ‘safe’ level of drawdown for their clients, an increase from 28 per cent in 2020.
By contrast, the use of fixed rates (otherwise known as the 4 per cent rule) or range methods has fallen from 41 per cent to 37 per cent in the past year.
The "4 per cent rule" was first devised by US adviser William Bengen in 1994 and describes a 'safe' level of pension drawdown.
But increasingly advisers have deemed this level too high and have opted for lower rates.
According to Aegon 32 per cent of advisers now use a rate of less than 4 per cent - compared with 21 per cent a year ago.
Krupesh Kotecha, financial planner at Balance Wealth Planning, said the 4 per cent rule has always been a “fallacy” which was based on a particular model, in a particular market, during a specific timeframe.
Instead, he said, the client’s own personal withdrawal rate was important, and this changes throughout their life depending on various factors such as other sources of income, spending patterns, inflation, returns, and taxes.
Kotecha added that modelling tools are helpful in this regard as they “help to set a route for the path ahead and navigate it as things change”.
Toby Bentley, financial adviser at Lathe & Co, said the fixed rates were a byproduct of the annuity purchasing days and since flexi-access drawdown was introduced people have stuck to this method to replicate the security of an annuity.
But he said this approach ignored key considerations.
Bentley said: “Firstly, we know retirement is a fluid period of life; people tend to spend more in the early years of retirement when they are more active, and the latter years when care costs become relevant. Therefore, the corresponding income should also be fluid rather than pre-set.
“From a financial planning perspective, it can also be much more cost effective to drawdown dynamically, whereby one can vary annual withdrawals dependent on investment performance; siphoning off more in the years their investments have overperformed to fund those years when there is underperformance.”
Meanwhile, Gabriela Strug, financial planner at Satis Wealth Management, said in her experience no qualified planner has ever followed the 4 per cent rule and that the only sensible way to manage withdrawals was with ongoing advice.
She added the 4 per cent rule was redundant as it failed to offer tailored guidance to each individual's specific situation.
Strug said: “Some years may be much more expensive than others and frankly some people may not have enough saved for retirement in order to take 4 per cent comfortably without it inevitably running out.
"Assuming people are happy to run their savings pots down by the time they die, others may be in the fortunate position to take more than 4 per cent.”