Danby Bloch: The hierarchy of retirement income needs


Assessing a client’s capacity for loss in retirement is one of the most important, but also one of the trickiest, parts of the planning process for drawdown. With this in mind, it is welcome news when methods emerge to help advisers tackle the issue.

The process of assessing capacity for loss should be more about understanding the extent to which clients can cope with a major fall in their income than about the impact of capital fluctuations. The trouble is that most capacity for loss discussions are often more about falls in capital values than reductions to the client’s income.

The aim should be to assess clients’ income needs and to understand which of them are essential and need to be met under all circumstances. This can then be distinguished from the less essential income that the client could reduce or even dry up altogether without having a major impact on their core living standards. Some falls in income would be manageable; some would not. The key is to assess which is which. It is not rocket science.

This simple idea that should be at the heart of planning for expenditure in retirement has been systematised, first in the US by money guru Mitch Antony and then with some adaptations for the UK by Just Retirement.

The easiest way to envisage this set of priorities is as a pyramid (see image). The pyramid illustrates the various building blocks of retirement income needs.


Immediate concerns and debt

At the very base of the pyramid are the client’s most fundamental needs: the immediate concerns and debt. Many clients of financial advisers do not have much in the way of high cost consumer debt but some will do. The top priority is usually to clear these. There is also usually a good case for paying off the mortgage, which is likely to cost more than most investments can yield on a post-tax, post-inflation basis.

Essential income

This is the basic income most people need to meet their day-to-day expenditure on the basic core needs of life. It includes such items as food, clothing, housing costs and running a car. If a client could not meet these expenses, they would have to make major adjustments to their finances, possibly involving moving house and trading down.

Just in case fund

Strictly speaking this contingency fund is a static balance sheet item rather than part of a client’s income and expenditure matter. However, it is necessary to provide for this in the planning process. A common view is that this “just in case” fund covers about six months’ essential income needs and it should normally be kept in cash or near cash.

Freedom income

Once the client has met their base-line needs, they can consider the “freedom” or discretionary expenditure. This is expenditure that could vary if necessary, even if the clients have become used to this kind of spending in the years up to their retirement. Of course, some people’s idea of essential spending corresponds to other people’s view of discretionary expenditure.


With a comfortable amount of income available, clients may wish to help other members of their family, most likely younger relatives who need assistance with education costs, buying a home or setting up a business. Some clients may also wish to make significant charitable donations.


At the top of the pyramid are the dream purchases and spending. These could be high cost holidays, special cars or works of art. Most people do not achieve this to any significant extent but some do.

These different priorities can then be incorporated into the client’s long-term cash flow modelling. Cash flow modelling is particularly useful when modelling different scenarios to show the impact of decisions clients might make. It can be used to illustrate scenarios of different income requirements depending on changing investment returns or other developments that might take a client down the expenditure pyramid (for example, if there is insufficient income for discretionary expenditure).

The combination of prioritising income needs in a way clients can understand and then using it in cash flow modelling can be really powerful.

Danby Bloch is chairman at Helm Godfrey



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Danby is without doubt one of the leading thinkers in our business. But I wonder does he really think that the vast majority of clients would be sanguine about a reduction of income – at any level?

    I do agree wholeheartedly that in any drawdown discussion this is a paramount item, which when fully explored usually leads to the purchase of an annuity.

    The implication is that those who might just possibly contemplate a reduction of income may well have other assets on which to fall back. In this case it makes the annuity route even more compelling I would have thought. Current market activity only serves to further reinforce this.

  2. richard rhcook@btconnect.com 26th August 2015 at 4:33 pm

    I am not at all sure whether when you get to retirement you will actually be buying an annuity with your own fund!!
    As someone now in drawdown there is absolutely no way in which I would have bought an annuity. Most surprised that you think recent stock market declines have any impact on the decision ://www.face-book.com/TheInvestmentAndRetirementCoach/posts/511602349007687

  3. Richard

    I am not only at, but past retirement. Having taken my PCLS last year the rest awaits the purchase of my annuity. I don’t know when that will be – probably before I’m 75 – which still leaves me just over 5 years. But an annuity – jointly with my wife is what it will be. I have plenty of exposure to the market apart from my pension and a guaranteed lifetime return which is a healthy multiple of base rate looks attractive to me.

  4. Anthony John Etkind 27th August 2015 at 12:50 am

    Danby, first up congratulations on arriving at the conclusion that what worries clients in retirement is loss of income rather than loss of capital. That chimes with what I advised clients for 30+ years until my own retirement.

    What is perhaps worrying is that this debate is being conducted between you (?past NRD) Harry (definitely past NRD), Richard (apparently past NRD) and me (65 last June). Where are the advisers who are still in practice and advising clients in retirement?

    And do FOS and FCA understand this?

    Yes I am sure that Harry would like to buy an annuity one day, but at today’s rates? How many years before capital is returned? And what benefit to the next generation?

    For me, drawdown (albeit with sufficient cash in reserve) is the way forward. Hoping against hope that one day the politicians will stop meddling and that interest rates will return to their historic norm.


  5. @AJE

    Glad you brought up some of these points.

    1. “How many years before capital is returned?” I don’t really care. What I’m looking for with regard to my pension assets is a no risk guaranteed income. The likelihood is that I will turn my toes up before my wife and I don’t want her to have to worry about all the complex considerations of drawdown, not to mention the fees and charges that are taken along the way as well as the interminable meetings and reports.

    2.”benefit to the next generation” Firstly we have no children. But even if we had – the annuity is quite a good IHT mitigator. Our other assets and the house will still put us comfortably over the threshold. Our nieces and nephews are in for a handy windfall without any pension assets.

  6. PS

    And who better to consider retirement matters than those directly affected?

  7. @ AJ Etkind I am not retiring yet as I am still a relatively youthful 53 and have not yet got to the point where I can hang up my laptop and factfind. However, I think that both annuities and drawdown have their place, as do other sources of income and capital e.g. property, ISAs, other non-pension assets. One thing that seems perfectly clear from my discussions with clients near, at the point of, or in retirement is that BOTH options are relevant. For the part of expenditure which clients consider essential an annuity can provide a guarantee that the money will be there in the bank each month to pay these expenses. For the part of expenditure that is optional, including “bucket list” spending, gifts and wealth succession, then drawdown may have a greater appeal. In my own case I will be keeping my preserved final salary pension rather than transferring it, my wife will have a teachers final salary pension, so with the two state pensions we will have sufficient “annuity” income to meet our essential expenditure. For the rest, I will continue with my money purchase pension saving until retirement, and will then use drawdown to obtain a combination of tax free cash and income withdrawals to supplement my annuity income. I will also have saved in tax efficient vehicles such as Stocks and Shares ISAs and will also retain a healthy cash balance as an emergency fund and to enable me to stop withdrawing from my drawdown pot when markets move against me. If at any point in the future my circumstances change then I can annuitise more later, but until then I can retain the flexibility of drawdown, safe in the knowledge that I can reduce expenditure or use cash based assets when markets go south from time to time. I think this kind of balanced approach is something many of my clients value. Attitude to risk is clearly important, since drawdown may not be appropriate to many low risk investors, health is relevant, as enhanced annuities may offer better value to non-standard health clients, and the availability of alternative sources of cash/income may also influence things. If long-term interest rates and therefore annuity rates significantly improve this may also move the pendulum more towards annuitisation and away from drawdown. Basically, each client needs to be treated personally, listened to properly, and then advised in a way that is consistent with their needs and resources.

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