Low interest rates and rocketing longevity have rendered obsolete the assumption that a 4 per cent a year drawdown rate on a pension will see the retiree through retirement.
That is the view laid out in a new report by pension provider Aegon, produced with actuarial firm EValue.
The report found one in five people following the "4 per cent rule" - first devised by US adviser William Bengen in 1994 - will run out of money within 30 years of the first withdrawal.
The findings led Aegon to declare the rule of thumb "outdated", and evidence that tailored advice was increasingly important.
Instead of a flat 4 per cent, Aegon proposed drawdown rates on a "sliding scale" of between 1.7 per cent to 3.6 per cent a year, "depending on the risk profile and time period".
The risk profile would include the individual’s age, life expectancy, investment strategy and "willingness to accept a small chance of running out of money".
Steven Cameron, head of pension policy at Aegon, said ensuring retirement income lasted a lifetime was too important and complex "to be boiled down to a simple rule of thumb".
"The 4 per cent 'sustainable income' rule was developed in the US in the nineties, at a time when interest rates were significantly higher," he said.
"More recent studies in the US and UK have brought this figure down, but any attempt to come up with a single number will never work across a wide range of clients with different life expectancies, risk appetites, and capacity for loss."
He said people with assets outside their pension may be more comfortable with the risk of running out of money, while those relying on it as their sole income would want more certainty.
"Life expectancy is also a key factor with current health status, lifestyle, family history and advances in medical treatments all playing a part in the time horizon a client should be planning over. Advisers need to consider all of these factors to recommend a sustainable income rate personalised to individual circumstances," he said.
Since compulsory annuitisation was abolished in 2015, there has been a huge shift away from annuities, towards cash and drawdown.
The result is that longevity and investment risk has shifted from insurance companies to the individual, and their adviser if they have one.
Last year Aegon pulled out of the annuity market altogether, and has since staked its retirement business model on continued demand for drawdown.
Others, however, have argued that advised drawdown may not be a viable answer for lower income retirees.
Auto-enrolment specialists The People's Pension and Nest have both proposed default drawdown solutions for retirees who don't know what to do with their defined contribution pension pot.
Andy Tarrant, head of policy and government relations at BC&E, which runs The People's Pension, recently urged the government to introduce a policy that would automatically offer retirees a default drawdown product based on what was best for the majority of retirees.
He said this default product should be “price capped” and have “trust-based governance”. It should also “flip” to an annuity later in life, to make sure people were protected against longevity.
“If we don’t do these things we won’t be delivering for the DC generation,” he said.
But others strongly disagree with the idea of a default drawdown product.
Richard Parkin, head of pensions policy at Fidelity, said there was no way of designing a single drawdown policy that would suit a wide range of people.
"People do very different things with drawdown," he said.
"Some of them take no income at all. Some of them will be looking to use it to empty their pot quickly without paying too much tax. Others will be trying to create lifetime income.
"There's no default drawdown behaviour with which to give somebody a default solution," he said.
james.fernyhough@ft.com
