Now let's look at withdrawals

A withdrawal policy aims to set client expectations on how future income will be managed.

Setting out a plan of what will happen given some highly probable scenarios will help clients to understand that their income is not certain. It should also reduce the chance of them panicking if the market falls (or making the emotional and irrational decisions that can follow). It can also be used as the basis for your annual client review discussions.

The benefits of a withdrawal policy

As discussed previously, a key client benefit of pension freedoms is the ability to flex income to suit changing circumstances. The key benefit of a withdrawal policy is clear documentation of how you plan to meet the client’s goals by flexing their income over time. By demonstrating that you understand changing needs and showing how you will respond, you show your client that you are giving them flexibility and permission to spend. You are also helping them to understand the potential impact of using that flexibility.

It should also clearly document how you respond to external factors affecting how much money the client will have and how long it will last (for example, the impact on future income should the client's fund suffer from a significant fall in the stock market). There are two additional benefits to this:

  1. Your client is clear that their income is not guaranteed.
  2. You remove the emotion from future decisions, promoting better outcomes and streamlining the review process.

All of this should demonstrate the value of your advice and reduces the risk of client complaints in the future.

How to set up a withdrawal policy

The key steps to implementing a withdrawal policy are likely to include:

  • Being clear on the client's minimum and preferred levels of income. (The minimum level should be the least that they will be comfortable on - not that they can barely live on.)
  • Discussing how these levels should change over time: for example, to reflect a lower need for income when they are older; to aim to increase in line with inflation; or a desire to leave a legacy after death or gifts while still alive.
  • For example, income may need to reduce for a period when investment returns are negative to help protect long term sustainability.

This core plan for withdrawals clearly demonstrates how you aim to meet your client's objectives.

The policy should:

  1. State the need to review the plan at annual meetings (or ad hoc ones if required).For example, your review meeting will consider the client’s evolving circumstances, such as dependants, the health of the client or their spouse, unexpected needs to increase income or to take out a lump sum, and so on.
  1. Explain how you will respond to investment markets to manage composure risk (e.g. ensure this is worked out in advance) and sequencing and volatility risk (e.g. avoid disinvesting from markets during a downturn). This section could state plans such as:
    • If assets meet or exceed the target return, aim to increase income in line with RPI.
    • If assets significantly overperform, de-risking the portfolio where this is likely to increase chances of success, or setting excess assets against another goal (e.g. legacy or long-term care)
    • If assets significantly underperform, taking a reduced income for a period, to give funds a better chance of recovering and getting the client back on track.

    You should make it clear that these are guidelines, and that you will need to review the client’s circumstances in detail at regular intervals.
  1. Set out client asset holdings and their value, separating holdings in different tax-wrappers.
    Note anything outside of your direct management (such as legacy pensions or other sources of income like buy-to-let rentals).
  1. State the client’s goals.
    Clients are likely to have multiple and conflicting priorities. You should encourage them to focus on what’s most important to them. If they want to draw income from invested assets rather than choosing other alternatives such as buying an annuity, you should examine what is driving that desire.

    Once the client has focused on their primary goals, you can explain to them what the main risks are and what steps will be taken to manage them. Being clear on what goals you are focussed on should make it more likely that the client raises any changes to their personal circumstances and how this will change their goals in the future. This will also help you satisfy compliance that client goals are driving your advice.