Sustainable Flexible Drawdown Income Amounts
Published / Last Updated on 25/01/2021
Research by the FCA has found that 40% of people with flexible drawdown pension plans are withdrawing 8% or more of their pension pots each year. This is unsustainable. With no growth, your pension fund would last just 12.5 years if you kept at the same withdrawal level but if you increase pension fund withdrawals inline with inflation at say 2.5%pa inflation, then it would only last 11 years.
Allowing for inflation at 2.5% pa, then an 8% initial withdrawal increasing each year with inflation would be sustainable for the following years using the following growth rates:
- 0% pa fund growth (after charges): It would last 12.5 years.
- 2% pa fund growth (after charges): It would last 12 years.
- 3% pa fund growth (after charges): It would last 13 years.
- 4% pa fund growth (after charges): It would last 14 years.
- 5% pa fund growth (after charges): It would last 15 years.
If you reduce your initial income withdrawal to start at 4% and increase this each year with inflation, the fund would be sustainable with the following growth rates:
- 0% pa fund growth (after charges): It would last 19.5 years.
- 2% pa fund growth (after charges): It would last 24 years.
- 3% pa fund growth (after charges): It would last 27 years.
- 4% pa fund growth (after charges): It would last 32 years.
- 5% pa fund growth (after charges): It would last 40 years.
4% withdrawal sustainability
We therefore suggest you should not look to withdraw anymore than 4% pa of your pension fund as drawdown unless you have strong over-riding reasons to do so such as poor health, you have other secure income that covers all your main expenses or you are using the pension fund to withdraw as much as you can tax efficiently and below personal tax allowance thresholds or you have other secured/guaranteed pensions and state pensions that start at a later date to give you a ‘pay rise’ when your drawdown fund runs out.
