AJ Bell has defended its use of a 4% withdrawal rate as a key selling point of its new pension freedoms income solution against criticisms the rule is “meaningless”.
In a press release announcing the launch, AJ Bell touted the retirement portfolio service’s ability to allow advisers to promote the “much used” rule, which says that if someone withdraws 4% of their retirement fund value in the first year and then adjusts subsequent withdrawals for inflation, they should avoid running out of money for 30 years.
Focusing on this rule should help advisers “promote portfolio longevity”, the platform group said.
4% rule a ‘meaningless hang-up’
Commentators found AJ Bell’s choice to big up the 4% rule in its retirement portfolio service bemusing.
Plan Works managing director Nathan Fryer pointed out the 4% rule is based on US investors and “relies on investors being rational”.
Finalytiq director Abraham Okusanya called it an industry hang-up.
“The hang-up on 4% is meaningless really. That figure of 4% isn’t one that you should pay a lot of attention to because everyone needs their own withdrawal rate personalised to their own individual circumstances.”
Though he thinks the science behind the framework, or the idea that advisers should run good and bad scenarios to reflect the volatility of asset class returns and inflation rather than the traditional straight line cashflow projections, still stands up in today’s world, the actual withdrawal figure will vary depending on the client, he said.
“Whether that figure turns out to be 4% for you or 3% for me would differ depending on the age, sex, the time horizon the client has got and differ depending on the asset allocation,” he said.
The withdrawal rate will also depend on how flexible a client can be adapting to changing macro conditions, he added.
AJ Bell responds
An AJ Bell spokesperson told Portfolio Adviser that enabling advisers to promote the 4% rule is only part of the benefit of the service and added that it is up to advisers to decide what withdrawal rate is appropriate for each customer based on their individual needs.
That said, AJ Bell CIO Kevin Doran (pictured) said many advisers use the 4% withdrawal rate as “a useful rule of thumb”.
“The service is designed with a 30-year investment horizon in mind and should be able to accommodate withdrawals consistent with those implied by the 4% rule, but in truth, our studies show that many client’s spending rates drop off significantly in later life, particularly post 75+,” he told Portfolio Adviser.
Doran added that the portfolio service’s “Smart Rebalancing” feature accounts for withdrawals above or below 4% by reinvesting excess cash if withdrawals are low and resetting the portfolio at opportune times in the event that more than the ‘4% rule’ monies are taken out.
Parallels with 7IM product
Fryer said AJ Bell’s retirement portfolio service sounds very similar to one on offer from Seven Investment Management.
7IM launched its decumulation service for advisers in February 2018. The service came with no additional charges beyond management and investment fees.
Similarly, there are no explicit fees for using AJ Bell’s service, but clients will have to pay the 0.15% annual management charge on both funds, with the ongoing charges figure capped at 1%. They will also have to shell out on platform charges, scaling down from a maximum of 0.20%, though these will not be applied to the cash reserve.
Clients’ investments will be split across three buckets, with 45% being held in the AJ Bell Income and Growth fund, another 45% in the AJ Bell Income fund and 10% in cash.
“Given the popularity of the pension freedoms there is a real need for products and services that help advisers deliver an effective retirement proposition,” said Doran. “With income drawdown now the most popular retirement income option, advisers and their clients are having to get to grips with managing portfolios in the withdrawal phase and the specific challenge of sequencing risk.
“Our new Retirement Portfolio Service has been designed as a ready-made solution that enables advisers and their clients to focus on their income needs, without having to worry about the running of the underlying portfolio. The cash bucket will ensure they don’t have to sell investments at the wrong time and the yield generated by our two income funds should be able to support a sensible withdrawal strategy over the long term.”
