What is the safe withdrawal rate from pensions? White paper from Investec Structured Products asks whether 4% is still the magic number.

by | Jan 24, 2017

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It is more than 20 years since William Bengen produced his ground breaking research into “safe withdrawal rates” for pension pots. The US financial planner was the first to make his calculations using actual historical market returns rather than averages. Famously, he came up with a safe level of income that could be withdrawn over 30 years to ensure investors continued to receive an income in line with inflation, without running out of capital. The figure was 4%. Since then the figure has been challenged and criticised but 4% has stuck as a universal rule of thumb.

How useful is it today? Is 4% still a relevant basis for calculations? What other strategies could UK advisers use to protect the income and capital of retirees for today and tomorrow?

In a white paper entitled “4% still the magic number?” which looks at sustainable spending for UK retirement, Investec Structured Products have revisited the “safe” rate and have looked at some of the detail behind it in order to help advisers rethink the drawdown strategies used with clients.


They conclude that the SWR depends on a multitude of variables, and while the 4% rule remains a useful baseline, it offers no more than a starting point for a detailed retirement planning exercise.

The state of the market at the time of first withdrawal, the impact of fees and taxes, the optimum portfolio mix will all affect retirement planning. Above all, the client’s individual circumstances and attitude to risk will weigh on the solutions chosen.  Pension freedoms have changed the landscape dramatically, especially given the favourable IHT treatment of pension assets which lead many towards a strategy of capital preservation. A new approach to portfolio construction should be considered in the light of this, particularly given the pressure on fixed interest yields with inflation on the rise.

Leigh Fisher (pictured), of Investec Structured Products comments:  “Structured products are ideally suited to supporting sustainable spending in retirement. In my view they should be considered more widely by advisers who are looking to help clients to achieve income from their pension plans. The reason I say this is that they offer not only a high probability of delivering a known outcome but they also provide a base from which the IFA can build a broader portfolio. We need to change the mindset of the IFA to consider these products as a core part of their clients’ drawdown portfolios rather than using them as a satellite option, to top up the existing base.  This is particularly relevant where advisers are using cash flow modelling to help identify future client needs. When structuring a portfolio based on such forecasts, why not start with a structured product which will lower the volatility of the overall portfolio?”


For a copy of the white paper visit www.investecstucturedproducts.com or call 020 7526 9216

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