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Morningstar Research Identifies New Safe Initial Pension Withdrawal Rate for UK Retirees

Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today released new research that identifies a new, lower, and safe initial pension withdrawal rate for retirees in the United Kingdom. The paper, "Safe Withdrawal Rates for Retirees in the United Kingdom," finds that UK-based retirees using a traditional 4 per cent withdrawal rate against their initial retirement savings are at increased risk of experiencing a shortfall in their capital.

Against the backdrop of the new UK pension freedoms, Morningstar identified a safe withdrawal rate that accounts for the unique market conditions faced by retirees in the UK and that supports advisers in conversations with clients, many of whom will be considering the drawdown of their pension savings for the first time. Morningstar’s research identified a safe UK withdrawal range beginning at 2.5 per cent—less than the traditional 4 per cent rate.

Dan Kemp, Chief Investment Officer for Morningstar’s investment management group in the EMEA region and co-author of the report, comments:

“The investment industry has long referred to a safe withdrawal rate of 4 per cent and we were concerned to know if this is a reasonable assumption for current retirees in the UK. Most studies on the topic have been conducted for U.S. investors using U.S. data, and it was increasingly dangerous to leave this assumption unchecked given the greater number of UK retirees who must now familiarise themselves with the concept of safe withdrawal rates in light of the pension freedom rules. With more retirees expected to select pension drawdown over the purchase of an annuity, estimating a UK-relevant safe withdrawal rate is key to helping those individuals manage their retirement savings.

“The generous investment returns of the last century that supported a comfortable and long-lasting retirement portfolio for previous generations of retirees are no longer with us. In the current environment of low yields and high asset prices, clients and their advisers need to set realistic return expectations. We hope this analysis provides advisers with a framework to use with clients when considering the question of retirement spending. The research also highlights the importance of understanding the specific needs and preferences of a retiree in framing investment objectives.”

Morningstar anticipates the report will also assist advisers in helping their clients in the earlier stages of their financial planning by providing a more realistic estimate of the capital required to deliver a desired income level in retirement.