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Retirees in drawdown risk running out of money

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27/06/2018
Thousands of retirees are withdrawing too much money from their pension during periods of stock market volatility, leaving them with a potential savings shortfall later in life, a report has warned.

Since pension reforms came in three years ago, twice as many retirees 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.

The study by insurer Zurich found two in five (41%) people in drawdown do not adjust the amount they take from their pension during stock market dips.

With more than 431,000 retirees using income drawdown to fund their retirement, this means as many as 176,000 people could be impacted.

The report found 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.

Alistair Wilson, a savings expert at Zurich, said: “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.”

Zurich is calling for 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.

Three steps to protect drawdown savings in a market crash

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 widely than if all your investments are concentrated in a single area.

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.

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.

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