The FCA’s thematic review of retirement advice has suggested the drawdown withdrawal rate should reflect individual circumstances, not be a one-size-fits-all. Paul Squirrell, Head of Retirement and Savings Development, Fidelity Adviser Solutions, looks at the factors affecting the potential withdrawal rate for individuals.
[See the recording Paul’s 10 December deep dive into the Budget details HERE.]
US financial planner, William P Bengen, is credited with developing the 4% rule. This states that withdrawing 4% initially from a pension pot and increasing this each year by the rate of inflation means there is little likelihood of running out of money during a 30-year period.
Subsequent analysis by Morningstar suggested that the rate should be nearer 3%, though its latest report concludes that the safe withdrawal rate is 3.7%1. Bengen’s analysis was based on historic data, while the Morningstar study is underpinned by its view of future returns.
Reliance on a single figure may be overly simplistic
The recent FCA thematic review of retirement advice questioned whether a single rate, that doesn’t reflect individual circumstances, is appropriate. There are various factors that can impact how much money can be taken safely. Some of these are individual to the person. For example, age and health. Others are extraneous influences like inflation and investment returns.
The cost of a comfortable retirement
The Retirement Living Standards study suggests that the gross income for a comfortable retirement is £52,220 for a single person2.
Allowing for a full State Pension of £11,973, this would still leave a shortfall of £40,247. Withdrawing 3.7% would require a pension pot of more than £1m (assuming no defined benefits or other savings and investments).
Gross and net figures for a comfortable retirement
| Net (£) | Gross (£) | |
|---|---|---|
| Single | 43,900 | 52,220 |
| Couple | 60,600 | 69,466 |
Source: Retirement Living Standards, Pensions UK 2025
A 2025 survey suggests that the average pension pot for people aged between 60 and 66 is £310,0003.
Squaring the circle
A US study, looking over a 140-year period, revealed that retirees withdrawing at the rate of 4%, would have only a 10% likelihood of ending up with less than their initial capital after 30 years and a 10% chance they would have 6 times their original capital intact4. Simple adherence to a fixed 4% withdrawal rate ignores the individual factors that govern the calculation of an appropriate withdrawal rate. In many cases, as the US data suggests, 4% could be overly conservative.
So what circumstances determine how much someone can safely take?
• Age
Age is important. If the objective is for money to last until 95 with a 90% probability of success, a 65 year old could take 3.7% and a 70 year old 4.3%.5
• Longevity
If, through lifestyle choices or health issues, someone’s life expectancy is likely to be compromised, a higher rate could be taken. Choosing a 20 year term with a 90% probability of success means 5.2% could be withdrawn.6
• Access to other assets
A 90% probability of success years may be too conservative, particularly where there are other assets that can be used, like property equity. A 65 year old could withdraw up to 4.7%, if they accept a 70% probability of success over 30 years.7
• Inherited wealth
Anyone likely to receive a significant inheritance in the future could also accept a lower probability of success or select a shorter term.
Safe withdrawal rates based on term and equity rating
There are also other factors that should be taken into account. These include:
• Level of charges
Morningstar analysis suggests a 1% charge should reduce the safe withdrawal rate by 0.4% .8
• Equity weighting
While projected returns from equities are higher than other asset classes, the safe withdrawal rate is often lower, the higher the equity weighting. This is caused by the volatility of equities when a 90% probability of success is chosen.
• Legacy
If leaving a legacy isn’t a consideration, this could increase withdrawal rates.
• Inflation
In its 2024 report, Morningstar modelled partial inflation-linking: Income isn’t adjusted for inflation where the portfolio declined in value over the previous year. This increases the maximum safe withdrawal rate over a 30 year period from 3.7% to 4.2%.9
What’s more, this is a moving target. The withdrawal rate at outset may not be the most appropriate rate several years into retirement. The client’s circumstances may have changed. Health issues could emerge, for example.
Advisers do need to monitor withdrawal rates throughout retirement. Cashflow models are increasingly used which can be used to run alternative assumptions and stress test different scenarios.
Check out our report Sustainable withdrawal rates for drawdown clients for more on this subject.
The original article and others from Fidelity can be found HERE.
Source:
1 The State of Retirement Income, Morningstar, 2024, December 20241 The State of Retirement Income, Morningstar, 2024, December 2024
2 How to estimate likely retirement living standards, Pensions UK 2025
3 ‘What is the average pension pot in the UK?’, Nuts About Money, 2025
4 Why High Equity Valuations And Low Bond Yields Won’t (Necessarily) Break The 4% Rule, Ben Henry-Moreland, Kitces.com, January 2024
5,6,7,9 The State of Retirement Income, 2024, Morningstar, December 2024
8 How Much Can I Take From My Retirement Savings? Allan Roth, AARP, January 2022
Important information
This article provides information and is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. The value of benefits depends on individual circumstances. The minimum age clients can normally access their pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless they have a lower protected pension age. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.
Main image: erik-mclean-CdYiBHnksAQ-unsplash
