The quest for a 'safe' drawdown rate for clients with different needs has necessitated a shift in the way advisers make recommendations, Aegon has claimed.
Over the past four years, more advisers have been using modelling tools over the fixed-rate method - often set at the 4 per cent 'rule of thumb' - to determine ‘safe’ income drawdown rates for their clients.
According to Aegon's research, 66 per cent of advisers spoken to by the life and pensions giant in 2018 were using a fixed rate or a fixed range to determine what would be a sustainable rate of withdrawal for clients to take money from their pensions pot.
However, latest research carried out by Aegon has shown just 26 per cent of advisers now use fixed rates or a fixed range.
Rules of thumb are helpful but most people have different income streams.Richard Fyfe, Fyfe FinancialSome 51 per cent of those surveyed now say they use modelling tools - a rise from 38 per cent from 2021, and just 13 per cent in 2018.
Aegon pensions director Steven Cameron said: "There has been a huge shift in the methods advisers use to determine a ‘safe’ income drawdown rate in retirement in recent years.
"Modelling tools overtook the fixed rate method for the first time following the onset of the pandemic and the latest research shows there has been a further widening of this gap.
"The significant macro-economic instability and market volatility over the past two years will have played a part in this, as modelling tools facilitate a more dynamic approach to managing retirement income."
Advisers were keen to express why they prefer to use cashflow modelling. Director of Fyfe Financial Richard Fyfe said: "Rules of thumb are helpful but most people have different income streams starting and stopping at different times meaning they won’t simply take 4 per cent plus inflation from a single point in time.
"Cash flow tools allow us to evaluate sustainability for each client’s individual situation."
Andy Macintyre, chartered financial planner, commented: "The '4 per cent rule' is not failsafe, especially for early retirements. Deterministic cashflow models don’t always make risks clear.
"A stochastic model, such as Timeline can help consider outlier risks / probabilities of success, extreme scenarios, alongside a deterministic model, such as Voyant."
Chris Philcox, financial adviser with True Potential, said: "A safe drawdown rate of 3.5 per cent is a good starting point for clients to consider what they can draw from wealth, but for those clients wanting detail, then cashflow/modelling tools give them a clearer understanding of what income they can expect and how different wrappers achieve this."
Cost of living crisis effect
Cameron added: "With the cost-of-living crisis taking hold, some people might look to draw down a higher income from their pension to compensate for rising prices.
"However, this carries the risk of depleting funds earlier than planned, particularly during a period of market volatility, so it is important to seek advice before making important decisions that could have lasting impact.
"The research shows advisers are already updating their tools and assumption to deal with greater uncertainty and changes in spending behaviours.”
Aegon carried out the research with Next Wealth, at the end of 2021. It canvassed views from 212 financial advisers and supplemented this with in-depth interviews.
- When advising on income drawdown, half of advisers (51 per cent) use modelling tools, an increase from 38 per cent the previous year.
- There has been a further decline in use of the fixed rate method, with a quarter (26 per cent) of advisers using this method, down from 37 per cent the previous year and 66 per cent in 2018
- Where a fixed rate is being used, the research shows an increase in the rates typically used, following a fall during the first year of the pandemic.
- Ease of use is the main consideration when selecting retirement planning tools (27 per cent), followed by reporting capability and client functionality.
As reported in 2021 by FTAdviser, official data from HM Revenue & Customs has shown those taking flexible withdrawals from their pension exercised restraint during the early stages of the pandemic.
However, the increase in the fixed rates used suggests some clients are looking to draw down a higher income as Britain emerges from the pandemic. This could also reflect the need for retirement incomes to keep pace with rising prices, Aegon warned.
simoney.kyriakou@ft.com
