Thousands of retirees at risk of draining their pension pots because of market volatility
Swindon, June 27, 2018
- With two in five (41%) people in drawdown not adjusting their pension income levels accordingly to account for stock market dips, Zurich warns of the risk of outliving retirement savings
- A third (32%) of adults in drawdown have never invested in the stock market before and two in five (41%) admit to not receiving advice or guidance
- To help retirees manage their retirement savings, Zurich is urging the Government to publish guidance on safe withdrawal rates for retirees in drawdown
The study – the largest of its kind on flexi-access drawdown – found that two in five (41%) people in drawdown are withdrawing the same amount from their pension regardless of how the stock market performs. With more than 431,000 retirees using income drawdown to fund their retirement, this means as many as 176,000 people could be impacted
Since pension reforms were introduced, twice as many retirees are choosing to keep their pension invested and draw a regular income rather than buying an annuity. This means the value of their pot can rise or fall in line with the stock market. However, Zurich has found early evidence that consumers may not be aware of the need to consider adjusting their income in choppy markets, putting them at risk of outliving their retirement savings.
According to the study, a third of people using drawdown (32%) have no hands-on investment experience and two in five (41%) have not received either financial advice or guidance. A further third (29%) claimed they were confident in their investment decisions, despite having no previous experience of actively investing.
To help consumers manage their retirement savings accordingly, Zurich is urging the Government to publish safe withdrawal rates for retirees in drawdown and make it mandatory for people to opt either in or out of guidance before accessing their defined contribution pension.
Alistair Wilson, a savings expert at Zurich, said, “Retirees in drawdown need to be flexible about how much money they take from their pension. Withdrawing more than the return of their portfolio, or when the value of the underlying investments has fallen, could lead to a savings shortfall in later life. When stock markets are volatile, retirees should be prepared to adjust their income to ensure they can sustain their pot throughout the course of their retirement. Setting the right level of income at different stages of retirement can be difficult, which is why speaking to a financial adviser or seeking guidance is important.”
“With more people selecting drawdown over annuities, the Government should introduce a UK-relevant safe withdrawal rate to help consumers manage their retirement savings accordingly. The Government Actuary Department already publishes GAD rates for capped drawdown, which could be made relevant for consumers in flexi-access drawdown and published on the new Single Financial Guidance Body’s website. While this might not be a silver bullet, it would act as a rough guide for those not getting advice.”
The research also found that one in ten (10%) UK adults not getting advice rely on search engines to help them navigate the complexities of drawdown, while one in five (20%) look at newspapers and magazines. Pension firms were the leading source of guidance for a third (35%) of consumers, though 44% of all those in drawdown confessed there is nothing that would prompt them to get advice or guidance.
The Drawdown: Is it working for consumers? report from Zurich is the first and largest study of its kind, exploring the impact of drawdown on almost 750 people since the pension freedoms.
Two strategies for taking income in drawdown
1. Harvesting the natural yield
For those who can afford to do so, taking the ‘natural yield’ – harvesting the income from their portfolio and leaving the underlying investments intact – can help to sustain their savings throughout retirement. This can help to grow the value of the pot and the income it delivers.
2. Withdrawing the capital
For many investors, the natural yield alone won’t give them enough income, and they may need to top this up by selling investments (withdrawing the capital) from their pot too. The danger is that selling after markets have fallen, locks in losses, leaving investors with a lower value pot that will in turn generates less income. This can make it harder for the pot to recover.
Three steps to protect drawdown savings in a market crash1. Diversify your investments
A well-diversified portfolio is a good defence against market falls. By investing across a variety of different asset classes, sectors and regions, you can spread the risk much wider than when if all your investments are concentrated in a single area.
2. Build a cash buffer
Building up a cash buffer can protect against falling stock markets. If the worst happens, and the stock market crashes from its high, then having a reserve of cash gives you an income to fall back on. Holding one to two year’s cash means you won’t be forced to sell when prices are falling, thereby locking in losses. Instead of cashing in funds, you can dip into cash reserves, giving your pot a chance to regain lost ground.
3. And if it comes to the worst – turn off the taps
In drawdown you can turn off the income taps whenever you like. Selling funds after markets have fallen means there is no chance to make up losses, shrinking your pension fund and reducing its future growth. If you can afford to, scale back your withdrawals or place them on hold until markets have recovered. Alternatively, limit the level of withdrawal to the ‘natural’ income from share dividends or bonds. This leaves the underlying investment intact, giving it a better chance to recover when markets rise.