You are here: Home - Retirement - Retiring now - News -

Mass confusion over pension drawdown

0
Written by: Emma Lunn
25/06/2019
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.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Thomas Cook’s airport slots sold to easyJet and Jet2

The failed holiday company’s slots at Gatwick and Bristol have been sold to easyJet, and slots at Birmingham...
Thomas Cook’s airport slots sold to easyJet and Jet2

Royal Mint launches The Snowman 50p coin

In the run up to the festive season, The Royal Mint has issued a new commemorative 50p coin featuring The Snow...
Royal Mint launches The Snowman 50p coin

Mamas & Papas falls into administration

The parenting store has closed stores just days after rival Mothercare went bust.
Mamas & Papas falls into administration

Ryanair jetting towards US flights for £10

Ryanair is on course to achieve its long-held ambition of offering transatlantic flights to the US – and the...

Investing in car parks: a good vehicle for income seekers?

As the search for income continues, many investors are turning to alternatives, with car parks becoming increa...

A quick guide to guarantor loans – in association with Guarantor Loan Comparison

Considering a guarantor loan or becoming a guarantor yourself? Read our essential guide...

Results round-up: Companies to watch this week

Mulberry and more will face the music this week.

Product launches of the week

Select Property Group, Schroders, Leeds Building Society and more have exciting news this week.

Money Tips of the Week

  • RT @Defaqto: Will your home insurance leave you out in the cold? 🤔 Only a fifth of home contents insurance policies, and a quarter of home…
  • RT @Defaqto: Will your home insurance leave you out in the cold? 🤔 Only a fifth of home contents insurance policies, and a quarter of home…
  • Will your home insurance leave you out in the cold? 🤔 Only a fifth of home contents insurance policies, and a quar… https://t.co/36dfADXYr4

Read previous post:
Baby boomers earning more than ever

Middle-income 60 to 74-year-olds are earning more than ever before, according to the Institute for Fiscal Studies (IFS).

Close