Retired savers have slashed pension withdrawals over the past year to conserve funds during a time of intense market volatility, new research suggests.
They are taking an annual income of 4.7 per cent of their pension investments, almost a third lower than 6.4 per cent a year ago, amid unstable stock markets and Brexit uncertainty.
The dramatic slowdown in withdrawals has coincided with a slump in investment confidence, according to a report by financial services firm AJ Bell.
Retired savers have slashed pension withdrawals over the past year
The survey of around 550 over-55s with pension income drawdown plans shows they currently anticipate a return of 4.15 per cent from their pots, down from 4.83 per cent this time last year.
The findings chime with a recent survey of investors which revealed that nearly two thirds are concerned current global market turbulence will damage their portfolios, but most are choosing to ride it out and leave them intact.
Retirees often need to keep taking an income from investments to cover living expenses in old age, but financial experts warn they should tap cash savings and other assets if possible during market upsets.
This is to avoid a nasty trap known as ‘pound cost ravaging’ which can take a severe toll on pension investments, especially in the early years of retirement (see the box below).
What is pound cost ravaging?
This is also more boringly known as negative pound cost averaging in financial jargon.
It means that when markets fall you suffer the triple whammy of falling capital value of the fund, further depletion due to the income you are taking out, and a drop in future income.
This poses a problem every time markets take a tumble, but is especially dangerous at the start of retirement because investors can rack up big losses and never make them up again if they aren’t careful.
Read more here about how ‘pound cost ravaging’ can irretrievably damage retirement pots in the early days and how to avoid this happening to you.
Market carnage in December has been followed by a recovery this year, but volatility has kept investors on edge, especially with a Brexit deal yet to be resolved with the EU.
See the table below for how the FTSE All Share has performed over the past year.
‘Pension freedoms investors appear to be responding sensibly to difficult market conditions and Brexit uncertainty,’ says Tom Selby, senior analyst at AJ Bell.
‘The fact many people are adjusting their investment expectations and cutting withdrawals in response to negative returns is an encouraging sign.
‘With the FTSE 100 expected to provide dividend returns of 4.9 per cent in 2019, investors may be able to apply a ‘natural yield’ strategy and maintain their lifestyle in retirement without eroding their capital.’
Relying on natural yield means taking only money generated from dividends in shares or funds of shares from your investments.
Selby adds: ‘This will, of course, rely on retirees taking sufficient risk and the underlying companies delivering the anticipated shareholder payouts.
‘The majority of people aren’t entirely reliant on their personal pensions to provide an income in retirement, further suggesting current withdrawal levels are not a major worry.’
FTSE All Share: Market is volatile as Brexit, trade wars, and worries about a slowdown in the US and China spook investors (Source: Yahoo Finance)
The AJ Bell survey found 30 per cent were relying on their personal pensions for over 40 per cent of their annual income, while 40 per cent said their withdrawals represented less than 10 per cent of their income.
Selby did identify a couple of worrying trends from the research. First, three in ten of those asked didn’t know how their pension fund had done since they entered an income drawdown plan, suggesting many people are not carrying out performance checks or reviewing how they are invested.
‘These people are effectively relying on blind luck in ensuring their retirement income strategy remains sustainable,’ he says.
‘A sudden dip in the fortunes of their investments – and there is no shortage of potential economic shocks right now – could turn a sustainable-looking withdrawal strategy into a patently unsustainable one.’
Pension decisions: Retirees are taking an annual income of 4.7% from invested funds, down from 6.4% a year ago and 6.8% the year before
AJ Bell suggests reviewing your pension fund at least once a year, but probably every six months. Read more here on how to carry out a healthcheck of your investments.
A second worrying signal comes from AJ Bell’s analysis of what people are doing with money withdrawn from pension funds. This supports previous research showing retirees are transferring sizeable chunks of their pension funds to bank accounts.
Financial experts frown on this as people are letting their money get gobbled up by low interest rates and inflation, potentially missing out on future investment growth, and becoming liable for unnecessary tax.
Selby says of the practice: ‘This may be due to a lack of trust in pensions, fears the Government will tinker with the rules in the future or simply because they want to feel in control of the cash.
‘These savers face double jeopardy as they risk paying unnecessary tax on withdrawals and seeing the value of their pot eroded by inflation – particularly where their bank account pays 0 per cent interest.
‘They also miss out on the opportunity to grow their pot over the longer term by investing in the stock market.’
What are retirees doing with money withdrawn from pensions?
The table does not add up to 100% because some respondents did not enter a value for all the options, says AJ Bell
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