- When advising on income drawdown, half of advisers (51%) use modelling tools, an increase from 38% the previous year.
- There has been a further decline in use of the fixed rate method, with a quarter (26%) of advisers using this method, down from 37% the previous year and 66% 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, followed by reporting capability and client functionality.
- Advisers highlight challenges in delivering minimum income requirements amid macro-economic uncertainty and market volatility.
A key challenge of retirement income planning is determining how much income you can take today while minimising the risk that assets will be exhausted earlier than planned.
Since 2018, Aegon research with Next Wealth has tracked the methods advisers use to determine a ‘safe’ withdrawal rate. Over this period, there has been a significant shift from the fixed rate method (such as the ‘4% rule’) towards modelling tools.
In 2018, 66% of advisers said they use the fixed rate, or a fixed range, to determine a sustainable withdrawal rate, but the latest research shows this has fallen to a quarter (26%). In contrast, modelling tools have grown hugely in popularity. In 2018, just 13% of advisers said they use modelling tools to determine a safe withdrawal rate. In the latest research this had increased to half (51%) of advisers.
The research also looked at the main considerations for advisers when choosing retirement planning tools. Ease of use was the main consideration for 72% of advisers, followed by reporting (52%), client functionality (52%) and value for money (48%).
Use of fixed rate or range
While the proportion of advisers using a fixed rate has fallen year on year, where it is being used the research shows an increase in the rates typically used compared to the first year of the pandemic. While no advisers were suggesting rates much above 5%, use of a rate above 4% had risen to 27% compared to 12% the previous year.
Official data showed 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 we emerge from the pandemic. This could also reflect the need for retirement incomes to keep pace with rising prices.
Steven Cameron, Pensions Director at Aegon comments: “Our research shows 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 last two years will have played a part in this, as modelling tools facilitate a more dynamic approach to managing retirement income.
“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.”
