Monday 21st January 2019
Pensioners are increasingly taking advantage of the Pension Freedoms introduced in 2015. While the move offered far more flexibility in how you take an income in retirement, it also means there’s more responsibility on your shoulders too. For retirees that have chosen to leave some or all of their pension invested, protecting its value and the income it provides is important.
Flexi-Access Drawdown allows pensioners to leave some or all their pension invested, rather than purchasing an Annuity that provides a guaranteed income. It’s an attractive option for two key reasons:
But how can remaining invested during retirement affect your income, and why might you need to protect it?
As with all investments, there’s a chance it can decrease in value. Should you decide to make a withdrawal at a low point, you would need to sell a larger percentage of your pension fund to receive the same level of income. This means that your savings are used quicker, which has a knock-on effect that reduces future growth too. This is known as pound-cost-ravaging.
As a result, it’s recommended that retirees take a lower level of income when their investments are underperforming. However, it’s a step that many are failing to take. According to research from Zurich:
Alistair Wilson, Zurich’s Head of Retail Platform Strategy, said: “A staggering number of retirees appear to be in the dark over how to protect their pensions if stock markets tumble. Withdrawing the same level of income in a downturn could take a bigger bite out of your pension fund – yet it’s a trap that’s easily avoided.”
Holding some of your savings in a cash reserve gives you an opportunity to ride out bumps in the market. If investment values fall, using your cash assets, rather than withdrawing from your pension, can help protect value.
How much you should hold as a reserve will depend on your personal circumstances, including living expenses and other liquid assets you have access to. This is a step many retirees are taking but the research suggests a high portion will be reluctant to use cash. However, it’s a step that could improve value and wealth in the long term.
Understanding how much you can sustainably afford to withdraw from your pension is a critical step before you proceed with Flexi-Access Drawdown. When you choose this route, you’re responsible for ensuring that your pension will continue to support you throughout your life. As a result, investing some time in understanding what’s sustainable is important.
Again, a sustainable level will depend on your personal circumstances. But an annual withdrawal rate of around 3% can be a benchmark for some. As a result, if the value of investments falls, so too will the withdrawal amount. If you want help in understanding how you can take a flexible income from your pension, please contact us.
If your pension does remain invested in retirement, you need to take a more active role in monitoring its performance. As this will have a direct impact on your income, regular reviews should be considered essential.
While monitoring performance should be a step you take, it’s important to remember that short-term volatility is normal. Don’t panic if you see that your pension has decreased in value but have a plan in place for when it happens.
Reviews alone aren’t enough, you need to take action when necessary. Should investment values fall, scaling back the amount you’re withdrawing or even stopping can help preserve the value of your pension in the long term. Often dips are only temporary, and you’ll be able to begin sustainably withdrawing the same level of income again in future.
Of course, you need assets you can fall back on. This is where a cash reserve can help provide you with security should a downturn occur.
If your investments are too volatile, you may benefit from diversifying or reducing the level of investment risk you’re taking.
Working with a financial planner can help create a retirement plan that works for you, bringing together your aspirations with your pension savings. By working with a professional, you can be more confident in the decisions you’re making and understand how potential investment downturns will affect your income.
If you’re using a Flexi-Access Drawdown product or are considering doing so, please contact us. We’ll help you understand how market volatility could affect your income in the short, medium and long term, and the steps to take to safeguard your retirement aspirations.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.