Pension Freedoms – Impact on Affordability?


Pension freedoms give retirees much more choice around how they draw their pensions. Potentially, choosing to drawdown the whole of their pension in one go or in several large chunks, instead of taking regular monthly amounts. This gives rise to more uncertainty as to the level of income later life borrowers may have in retirement.

A different approach to assessing affordability is therefore needed in relation to retirement savings that remain invested, as opposed to traditional pensions where the level of regular income is known.

This short guide aims to give you more guidance on how to assess pension savings held in drawdown or similar arrangements.

What are the risks to affordability of invested funds?

The two key issues affecting affordability are:

  • Determining an appropriate value for the fund in the future, because it could be subject to material falls in value if markets crash;
  • Determining a sustainable level of income that can be withdrawn from the fund, avoiding the risk of depleting the fund too soon.

Estimating fund values

Our underwriters will start their assessment using a statement of the current fund value, to which we apply an assumed growth rate of 4% per annum.

Between 75% and 100% of the fund value is then allowed in order to calculate the level of sustainable income that can be withdrawn from the fund.

Calculating sustainable income

The amount of income that can be drawn sustainably is calculated as between 5% and 7% of the fund value. If the borrowers are drawing higher amounts, this additional income will not be eligible for affordability purposes.

Dependant’s incomes

In the event of first death, we assume that the survivor shall inherit the remaining fund, and it will continue to generate an income for the borrower at the same rate.

Monitoring the fund

To address the risk of rapid depletion of the fund, we will undertake periodic checks at prescribed trigger points to consider whether the fund continues to perform as anticipated.

Need more information?

If you want further help or insight on how we assess affordability, please contact us.

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