One year on from pension freedoms, income drawdown investors are thriving
A year after pension freedoms were introduced, retirees using income drawdown appear to be managing their investments successfully, according to analysis of 27,000 drawdown investors by broker Hargreaves Lansdown.
The research looked at a variety of aspects of investors' behaviour, including investment choices and performance, the extent to which they panicked and sold out in volatile markets, the level of cash reserves held and the proportion of income they withdrew.
The evidence suggests that as a group they are managing well within the new environment of pension freedom, and that they are not on the whole making poor investment decisions that could threaten their later financial security.
The 10 most popular funds held have outperformed their sector average by an average 4%, while the 20 most popular - accounting for around 30% of total investments by value - have beaten their sector by around 2%, suggesting investors are making well-informed and robust choices.
The top 10 funds unsurprisingly have a strong bias towards income, whether UK or global; they include Artemis Income, Artemis Strategic Assets, Woodford Equity Income, Lindsell Train Global Equity Income, Marlborough Multi-Cap Income and Newton Global Income.
Typically they are holding around seven funds, which Hargreaves Lansdown's Tom McPhail says "looks about right".
"An average of just a couple of funds could suggest an excessive concentration of the portfolio and more than around 10 probably gets unwieldy for all but the more diligent of active investors," he adds.
Some are also holding individual stocks, with names such as Lloyds Bank and GlaxoSmithKline widely in evidence. "This [portfolio spot-check] does not definitively prove that every investor is getting their investment strategy spot on, but it is building an encouraging picture," says McPhail.
He reports that there has been no sign of a rush for the exit in the unpredictable markets of recent months either, with "a healthy positive ratio of buyers to sellers". On the whole they are holding between 20 and 25% in cash as a buffer to sidestep the need to withdraw cash in falling markets.
A snapshot of Moneywise’s sister website Interactive Investor's Sipp portfolios shows almost two thirds in funds, with around 17% in cash, slightly less than Hargreaves investors.
Roughly 18% is in individual stocks, including Lloyds, RBS, Glaxo and National Grid - reflecting the broker's more equity-oriented investor profile.
Rebecca O'Keeffe, head of investment at Interactive Investor, comments: "It may be a surprise that three of our top five most-held collective funds are Vanguard LifeStrategy options - however, our flat fee pricing and the lack of any additional percentage-based platform fee, means that we have seen a dramatic increase in investors holding low-cost index-style funds.
"There's little attraction in buying a fund for 9-10 basis points (bps) and then paying a further 45bps on top."
On average the investors in Hargreaves' survey have withdrawn around 3.6% of their portfolio in income (not counting one-off lump sum withdrawals) over the year, which is considered a sustainable level for the long term, that will not threaten the underlying capital base.
Hargreaves reports that the withdrawals have been used in a variety of ways. Over a quarter of respondents (27%) held cash, while around 22% put their money into an Isa, possibly as a response to the uncertainty now surrounding the future of the pension system. Less than 10% used it to pay for a holiday.
McPhail concludes: "The overall data paints a healthy picture of investors self-managing their drawdown arrangements effectively. However we can also see that more work needs to be done.
"Within these excellent figures, it is likely there are some investors who would benefit from better support and guidance to help them manage their retirement incomes effectively."
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.