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Mass confusion over pension drawdown

Emma Lunn
Written By:
Emma Lunn

More than half of retirees in pension drawdown – about 307,000 people – are unaware they can vary their income up and down, or stop it altogether.

Research by insurer Zurich found that half (52 per cent) of over-55s taking an income in drawdown didn’t know they could reduce the value of their withdrawals, and more than half (56 per cent) were unaware they can stop them – despite income flexibility being a defining feature of the pension drawdown product.

Zurich’s study questioned 2,000 people who have unlocked their savings since the 2015 pension reforms. It found what Zurich calls a ‘critical gap in consumer awareness’ is leaving drawdown investors at risk of draining their retirement savings too rapidly, especially if markets drop.

More than 615,000 people in drawdown could be exposed if stock markets plunge. If shares tumble, investors risk falling into to a trap known as ‘pound-cost-ravaging’. This is where, as stock prices drop, retirees are forced to sell more investments to achieve the same level of income, depleting the capital of their pot quicker, and reducing its future growth.

Alistair Wilson, Zurich’s head of retail platform strategy, said: “Investors taking a fixed level of income in drawdown could struggle to sustain their pots throughout retirement. Drawdown gives people the flexibility to shift their income up or down as their spending needs change, or markets fluctuate, yet a staggering proportion of people are seemingly in the dark over the control they have.

“If investment returns come to a sudden halt, savers need to be prepared to step on the income brakes. People who are unaware they can slow down, or stop their income, could seriously damage their savings, and deplete their pots too soon.”

Zurich suggests savers protect their portfolio from pound-cost-ravaging by holding up to two years’ worth of living expenses in cash, which reduces the need to sell investments when prices are falling, giving them a chance to ride out short-term bumps in the stock market.

Alternatively, limiting withdrawals to the ‘natural’ income from share dividends or bonds leaves the underlying investment intact, giving it a better chance to regain lost ground when markets recover.

The importance of advice

Zurich found significant differences between consumers who have sought advice and those who haven’t. Just 35 per cent of non-advised consumers understood they could reduce their drawdown income, compared to 77 per cent of people getting ongoing advice.

Wilson said: “Investors are making complex choices in drawdown without fully understanding how it works. To overcome this critical gap in consumer awareness, it’s important that people engage with their savings in drawdown, ideally with the help of a financial adviser.”