Retirement Planning
What the exam tests
Retirement Planning tests accumulation and decumulation: adequacy, contributions, tax relief, withdrawal strategies, longevity and sequencing risk.
Core rules
- Replacement ratios are a starting point; build income needs bottom-up, net of state benefits.
- Accumulation uses future value of contributions; decumulation uses sustainable withdrawal rates, annuities or a combination.
- Sequence-of-returns risk matters more in drawdown: early losses are not recovered by later gains on the same capital.
- Pension tax relief is at the marginal rate; annual and lump-sum allowances cap the benefit.
- Annuity rates depend on age, gilt yields, health and options; drawdown transfers investment and longevity risk to the client.
Worked example
A client has a £500,000 pot and needs £25,000 gross a year. A 5% initial withdrawal looks sustainable, but a 20% fall in year one leaves £375,000 after the withdrawal; recovering to £500,000 then requires a 33% gain. At a 3.5% withdrawal rate, the required pot for £25,000 is £714,286. Charges of 1.5% a year reduce the sustainable rate materially over 30 years.
Traps
- Using average returns and ignoring the order of returns.
- Forgetting tax on withdrawals and on the state pension.
- Assuming a fixed 4% rule fits all durations and fee levels.
- Ignoring longevity and inflation-linked spending.
- Confusing the accumulation phase with decumulation.