The recent Dear CEO letter to financial advisers has put into acute focus the need to evidence a rigorous approach to portfolio construction and the assessment of safe withdrawal rates for retirees. How successful income drawdown will be for a client depends as much, if not more, on the withdrawal strategy as it does on the investment strategy. The two are closely linked through the effects of inflation risk and sequencing risk as well as basic risk-return trade-offs. We recently published a report supported by Aegon on the topic of retirement advice. The results should be helpful to advisers looking to benchmark their own approach against industry norms.

When we conducted this research in 2018, we found that 66% of advisers used a fixed rate or range with two-fifths of these using a fixed rate of 4%. This has fallen sharply this year with 41% using a fixed rate although the traditional ‘4% rule’ remains very popular with this group.

Much of this is due to a shift towards using modelling tools to help assess withdrawal strategies. This includes traditional cash flow planning tools but also tools such as Timeline by FinalytIQ, which helps advisers model withdrawal strategies and investment strategies together. This move to using modelling tools is most pronounced for larger firms with smaller firms making greater use of annuity rates to guide income decisions.

The proportion of advisers using fixed rules for drawdown (eg the 4% rule) has fallen since last year but is still relatively high. While these rules are simple to use and explain, they tend to be inefficient. In order to deliver a high degree of confidence that money will last, they inevitably assume a relatively low starting level of income; and by delivering greater certainty that clients won’t run out of money, they also increase the likelihood that clients leave money behind. For those looking to spend more in early retirement and maximise lifetime income this is not the best outcome.

By taking a more dynamic approach to withdrawal strategy and varying income based on market conditions, advisers can maintain the certainty of making retirement savings last while ensuring clients use more of their savings while still alive. It also allows advisers to better tailor income profiles to match client needs rather than just providing an ever-increasing income that may be more than clients need in later life.

You can download the full report here.

About the Author

Heather is a data and research expert specialising in retail investment distribution. Heather is the Managing Director and Founder of NextWealth. She is also a Director of Clive Waller Consulting Ltd and serves as Vice-Chair of The Investment Network and the Schroders UK Platform Awards.