Retaining control of your pension funds

Retirement planning used to be simpler. You worked hard, saved your money, and when you retired, you probably took a lump sum and bought an annuity for a lifelong income. However, now there are multiple options to consider when planning for retirement.

Identifying retirement needs and goals

Each client's retirement needs are unique and require a personalised approach. At Ascot Lloyd, our advisers begin by thoroughly understanding the client's retirement goals, lifestyle preferences, vision for their future, risk tolerance and capacity withstand financial loss. This involves delving into what truly matters to them, how they envision their ideal retirement lifestyle and the specific elements they want to incorporate and prioritise into their retirement plan. By taking this detailed approach, we can tailor our services to meet each client's individual needs and aspirations effectively within the boundaries of their available resources.

Cash flow modelling

Cash-flow modelling is a key part of this exercise. Not many people like maths.  You may be one of them.  What cash-flow modelling allows, if for advisers to build a visual plan that takes account of personal goals, assets, expenditure and all sources of income. Amongst other things, we can factor in state pension, inflation, assumed growth rates, taxes, lump sum expenses and gifts to family. We can also stress test plans to allow for market volatility or test the robustness of the plan. Given that life expectancy for a 65 year-old is roughly 20 years, the risk discussion is also key. As you are going to see some challenging investment conditions over a retirees average life, more so if you live beyond that.  In short, based on the assumptions used, cash-flow modelling helps you to understand whether or not you’re going to be OK in terms of paying for the life you want to live when you finish full time work.

Volatility will always accompany investing and one thing to be especially wary of is something called sequence risk (basically, the order of returns on a portfolio).   Get the good returns in early years and this can really build future resilience but a poor start can really put you on the back foot.  As Forrest Gump said, “You never know what you’re gonna get”.

Keeping pace with inflation, particularly that which relates to what you actually spend your money on as opposed to generic basket of goods used by governments to measure inflation broadly, as ever, is crucial, particularly if you want to maintain the standard of living to which you have become accustomed. Added to these, each individual will have differing levels of capacity for loss (an individual’s ability to withstand financial loss to the point where it starts to impact their standard of living – ie. You have to stop or cut spending on one or more things which might mean brand shifting, taking fewer, shorter or domestic based holidays etc.).    

Sustainable pension withdrawal strategies

Over the past few years, much work has been done on the development of sustainable withdrawal strategies. Approaches to this differ. Some recommend keeping a few years’ income in cash, then applying different risk profiles to different tranches of pension funds, others swear by a single, multi-asset approach. Others invest strictly in dividend-income funds as these have delivered inflation beating returns consistently over the last 100 years.

Sustainable withdrawal strategies refer to methods for withdrawing funds from your retirement savings in a way that provides a steady income while ensuring that your savings last throughout your retirement. Some common withdrawal strategies include:

1. 4% Rule: This rule suggests withdrawing 4 percent of your retirement savings in the first year of retirement and adjusting that amount for inflation in subsequent years.

2. Dynamic Withdrawal Strategies: These strategies involve adapting your withdrawal rate based on market performance and your remaining life expectancy.

3. Bucket Strategy: With this approach, your financial adviser will divide your retirement savings into different "buckets" based on when you plan to use the money, such as short-term, medium-term, and long-term buckets, and then withdraw from each bucket as needed.

4. Guaranteed Income Sources: Another strategy involves using guaranteed income sources, such as annuities or specific pension plans, to cover at least essential expenses and then using the remaining savings for discretionary spending.

Each of these strategies comes with their own advantages and disadvantages, have different levels of flexibility and security and can all be more or less complex. For example,  the 4 % rule itself was based on a US only equity and fixed interest portfolio running for 30 years which took no account of the cost of investing or advice and 4% was the highest starting rate where the fund was not exhausted at the 30 year point.  As a result, it's essential to consider your individual financial situation, risk tolerance, and retirement goals when choosing a sustainable withdrawal strategy, which may include consideration of any partner who may also be dependent upon your retirement savings too. Working with an independent financial advisor can help you determine the best approach for your specific needs.

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