Pension experts are warning DIY investors that the universal rule of thumb for working out a sustainable withdrawal from their pensions does not work any longer.
Four more than two decades, pension advisers have advocated the ‘4% rule’ as a method of drawing retirement income without diminishing savings.
But research by financial firm Aegon suggests that taking a flat-rate income will lead to a one in five chance of pension cash running out within 30 years.
Instead, says the firm, pension savers should work to a sliding scale of taking cash from their pots that depends on their attitude to financial risk and their estimate of how many years they need to provide money for.
Sliding scale
The sliding scale suggests drawing between 1.7% and 3.6% of a pension fund each year.
For DIY investors, deciding the right withdrawal percentage means making some tough decisions about how long they will live and how much they are likely to spend each year.
Aegon says there is a clear message – retirement planning can’t rely on a rule of thumb approach and a more structured strategy tailored to personal financial circumstances will give a better outcome.
“Planning a retirement income to last a lifetime is too important and complex to be boiled down to a simple rule of thumb,” the firm’s pension director Steve Cameron.
Regular reviews
“The 4% sustainable income rule was developed in the 90s when interest rates were significantly higher. More recent studies 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.
“Advisers will be aware of the dangers that rules of thumb pose but we hope our sliding scale provides an additional insight on which they can build tailored income rates for different clients.”
Cameron also explained that people with a mix of investments including a pension might take more from their pot as they are less likely to run out of money in retirement.
“Income should be reviewed regularly to reflect changes in both personal circumstances and the wider economic environment. Advisers have the opportunity to add true value both at and in retirement, protecting and enhancing their client’s outcomes,” he said.
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