Are Brits drawing down their pension savings at too great a clip?

One of the tricky parts to living off a lump sum of retirement savings is figuring out how much to take out each year.

There are many theories on what the “right” percentage to draw down is, and many experts, such as Dr. John Por who spoke to Save with SPP last year say a perfectly correct number is “unknowable,” since no one knows what future interest rates and markets will be like.

But the general rule of thumb has been that taking out four per cent per year is a “sustainable” number.

That’s why it is surprising to read the news in Professional Pensions that across the pond, 43 per cent of Brits are withdrawing eight per cent of their retirement savings annually – double that rule of thumb.

The figure comes from new research from the Financial Conduct Authority (FCA) in the U.K.

“While you may need to make occasional ad-hoc withdrawals to cover large expenses, making regular withdrawals at this level risks depleting your fund,” states senior pension analyst Helen Morrissey of Hargreaves Lansdown. “If you also experience a period of investment volatility this can further impact your fund as you have no… contributions going in to make up any losses,” she states.

The number of Brits withdrawing at an eight per cent clip jumped from 40 per cent in 2020 to 43 per cent this year.

The article suggests that the pandemic has played a part in people taking more out of their pension savings.

Meanwhile, data from the FCA shows there has been a 13 per cent drop in annuity purchases in the U.K.

This may be, reports The Telegraph because of “a deterioration in annuity rates” thanks to generally low interest rates, and the fact that drawdown “will always give you the highest income” versus an annuity.

The Telegraph article says only an annuity approach guarantees that you won’t “exhaust your pension early.” They suggest a blend of the two options – drawing down some of your money at a sustainable rate, and annuitizing the rest, to ensure that you will never run out.

Save with SPP knows of at least a couple of people who ran out of retirement savings while still relatively young. It’s likely that they didn’t understand the idea that the big pot of savings is supposed to last as long as you do. It’s tempting to be sitting on maybe a hundred thousand dollars of savings, and thinking that it’s time for new windows and doors, or (one day) a vacation, and burning through it. But you’ll miss that money when you’re 90.

The Saskatchewan Pension Plan (www.saskpension.com) allows you to annuitize some or all of your retirement savings when the day comes to put down the shovel and stop working. The SPP’s Retirement Guide outlines all the annuity options you can choose from. And if you have a spouse, the annuity option means that your spouse will receive a lifetime income from SPP should you pass away before they do. That’s the peace of mind that saving for retirement with SPP can bring. Check them out today.

Join the Wealthcare Revolution – follow SPP on Facebook!

The pension industry has a big footprint.

With the top 300 pension funds around the world managing an eye-popping $19.5 trillion (U.S.) in assets – and with quite a few of those funds being Canadian-based – Save with SPP decided to take a look around to see what our own country’s pension leaders are saying about investment markets.

With $409.6 billion in assets, the Canada Pension Plan Investment Board (CPPIB) is the nation’s largest pension fund. CPPIB has identified four sectors of the economy it thinks will grow in the near future – e-commerce, healthcare, logistics (aka shipping/receiving) and urban infrastructure.

CPPIB expects “massive changes” in those areas, CPPIB’s Leon Pederson tells Tech Crunch. And while CPPIB invests for the long-term, the four areas identified by their research might “indicate where the firm sees certain industries going, but it’s also a sign of where CPPIB might commit some investment capital,” the magazine reports.

The $205-billion Ontario Teachers’ Pension Plan (OTPP) saw small losses in the first half of 2020, reports Bloomberg.

“Some of our hardest hit investments were among our private assets. Heavily-impacted segments were leisure and travel, including our five airports, and assets where consumer spending declined, which is our shopping malls and Cadillac Fairview,” OTPP’s CEO, Jo Taylor, states in the article.

However, losses were cushioned by the plan’s strong fixed-income returns, the article notes – in all, $7.9 million in income from its bond portfolio helped OTPP limit losses.

The $94.1 billion Healthcare of Ontario Pension Plan’s (HOPP) CEO, Jeff Wendling, recently told Benefits Canada that the plan is considering looking at some new investment categories as it pursues its “liability driven investing” strategy. With a liability driven investing strategy, the investment target is not beating stock market indexes, but ensuring there is always enough money to cover every current and future dollar owed to pensioners.

“We’re very focused on liabilities, but what you do when interest rates are at really extreme lows, in our view, is different than what we did in the past,” he states in the article. HOOPP, he adds, is now looking at infrastructure investing, insurance-linked securities, and increased equity exposure to generate income traditionally provided by bonds.

Large pension plans like CPPIB, OTPP and HOOPP have enjoyed a lot of success over the years. The takeaway for the average investor is that the large scale of these plans allow them to do things the average person can’t – like directly owning businesses (private equity), or shopping centres and offices (real estate) in addition to traditional stock and fixed-income investments. The big guys are taking advantage of diversification in their holdings, and so perhaps should we all.

Individuals and workplaces can leverage the investment expertise of the Saskatchewan Pension Plan. Its Balanced Fund is invested in Canadian, U.S. and international equities, bonds, mortgages, and real estate, infrastructure and short-term investments. And the fund has averaged an eight* per cent rate of return since its inception in the mid-1980s. Check them out today.

*Past performance does not guarantee future results.

Join the Wealthcare Revolution – follow SPP on Facebook!