“We all need to consider how much of a pension fund can be spent each year without meaning that we run out of money or our savings lose buying power due to inflation,” says Mike Morrison, Head of Platform Marketing, AJ Bell. “William Bengen's analysis in the US suggested that if savers spent 4.5% of the assets in their fund in the first year of withdrawal and then increased that amount by inflation each year their pot would last for at least 30 years under any tested historical scenario.”
Morrison continues: “This has been refined and become known as 'SAFEMAX' or 'The 4% rule'. This theory now faces the challenge posed by record-low interest rates. A low-yield world may therefore mean annuities still have a role to play in retirement planning, especially if new versions are devised to offer guaranteed income levels or pre-set death benefits, while multi-asset funds which target income generation with low capital volatility could also have a role to play here.”
Notes for Editors
- Since the Budget of March 2014, the Government has outlined a series of pension reforms which are due to come into force from 6 April.
- William P. Bengen first outlined his analysis in a 1994 paper for the Journal of Financial Planning.