'I fired my adviser': how pensioners are investing for income

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Pensioners have the impossible task of managing their spending so as not to deplete their retirement savings too soon.

Not knowing how long you will live can make it difficult to plan ahead but there are some ways to make sure you do not run out of money early. The “golden rule” of withdrawing 4pc from a pension pot has been popular since the 1990s and many financial professionals continue to recommend it.

However, there is no “one-size-fits-all” solution. The 4pc rule has been deemed “outdated” by some experts, who warned that those who follow it were more likely to exhaust their savings before they die. Others have found they have been able to take more thanks to the boost they received every year from strong investment returns.

Telegraph Money has asked the experts how they managed their own money.

‘Stop/starting my income was a bad idea’

It can take years  to refine a drawdown strategy until it is perfect, even for professionals, said Paul Saltz, who asked for his name to be changed.

The former financial adviser, who retired in 2012 at age 68, said he has had to learn how to maximise his pension through trial and error. 

Upon leaving work, Mr Saltz’s pension company gave him an estimate on what he could take without exhausting his pot too soon. However, he has since realised that it was far more money than he needed and he stood to lose out by burning through his investments.

Mr Saltz then followed a strict stop and start strategy where he would not take an income for months where markets had dropped and only started again once his fund had recovered.

He said: “In August 2015 my pension dropped so I turned the tap off.  By April 2017 my drawdown fund had recovered from £190,000 to £264,000 so I turned the tap on again. Alas by November 2018 the fund had gone down to £232,000 so I turned the tap off again.”

However, in April 2020, when his fund recovered to £250,000, he decided to switch strategies. 

“It was too much of a hassle so I vowed to take a small income and never ever stop again. I now take £1,000 each month from my pension, which is currently worth £268,000,” he said. That equates to a withdrawal rate of 3.7pc per year.

Adventurous investing has helped Mr Saltz maintain the size of his savings. The retired financial adviser has always invested his pension in two bond funds, two equity funds and one fund that invests in the Indian stock market, in recognition of his cultural heritage.

He said his portfolio was divided between the Sentinel Enterprise Portfolio, Vanguard Lifestrategy 60pc stock, L&G Managed Monthly Income Trust, Invesco Perpetual Corporate Bond and Fidelity Asia funds. 

However, the pension is not Mr Saltz’s only source of income, as he receives a state pension and has an Isa as well as £111,000 in an investment bond. 

He said: “My advice for anyone who is unsure is draw around 5pc of your fund value but stay invested in stocks, that’s what I do. That is a relatively safe strategy.”

‘I fired my financial adviser and set up my own plan’

A career in finance gave Matthew Golds (a pseudonym) the confidence to sack his financial adviser when he realised his drawdown plan was not working.

Mr Golds, who is 72, said he only received two letters from his adviser since the start of the pandemic and he was concerned that not enough was being done to improve his situation. He has since moved half his pension into American fund giant Vanguard’s low cost LifeStrategy portfolio, that has 80pc in stocks and 20pc in bonds. This also significantly cut how much he was paying.

“I started doing the maths and I’m paying the fund managers and my adviser nearly as much money as I’m getting as an income after tax. I was paying about 2pc in total, which adds up over the years.

“Financial advisers have to do a lot to justify their cost and mine wasn’t. I had been with him for 20 years but he wasn’t proactive enough,” he said. 

Mr Golds had £1.5m in his self-invested personal pension but was not concerned about breaching the “lifetime allowance” because he applied for protection. This was done when the upper limit on how much you can have in your pension without incurring a huge tax charge was put in place.

The former financial professional also has a “defined benefit” scheme that pays out £12,000 per year.

The most important rule for drawdown is to have at least two years’ worth of income in cash, he said. Mr Golds said he had roughly £500,000 in cash, which means his Sipp investments have remained untouched for several years and can keep growing undisturbed. 

He said: “I know the returns are pathetic and I know that it’s costing me more money because inflation is creeping up. But I don’t want to have to use my pension for cash if markets are falling.”

Towards the start of his retirement, Mr Golds withdrew £90,000 from his pension every year but has not had to dip into it for two years now. “I have drawn down all my tax-free cash and now that it is taxable I’m being more careful with it.”