Retirees could be jeopardising their pension income and run the risk of outliving their money if they fail to consider the impact of market volatility on their savings.
This is the conclusion of new research from financial provider Zurich, which revealed that as many as four in 10 (41%) retirees who have invested their pensions to generate an income are not adjusting the level of income they take from their pot when stock markets drop.
When investors do not reduce the level of income they draw through periods of volatility, further pressure is put on the remaining capital and it speeds up the rate at which it runs down - a phenomenon known as ‘pound cost ravaging’.
Since the pensions freedoms were introduced in April 2015, Zurich says the number of retirees who are choosing to leave their pension invested, rather than trading it in for an annuity that pays a guaranteed income for life, has doubled. Those that choose to follow this route will see the value of their pension rise and fall according to stock market. Of these, nearly a third (32%) have had no previous experience of managing stock market linked investments, while over four in10 (41%) have not received any financial advice or guidance. However, nearly three in 10 (29%) were confident managing money they had not actively invested before.
In order to help retirees using income drawdown to better manage their savings, Zurich is calling on the government to publish ‘safe’ withdrawal rates and to make it essential for people to opt in or out of financial guidance before they dip into their retirement savings.
Alistair Wilson, savings expert at Zurich says: “Retirees in drawdown need to be flexible about how much money they take from their pension. Withdrawing more than the return of their portfolio or when the value of the underlying investments has fallen, could lead to a savings shortfall in later life. 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. Setting the right level of income at different stages of retirement can be difficult, which is why speaking to a financial adviser or seeking guidance is important.”
He adds: “The Government Actuary Department (GAD) already publishes GAD rates for capped drawdown, which could be made relevant for consumers in flexi-access drawdown and published on the new single financial guidance body’s website. While this might not be a silver bullet, it would act as a rough guide for those not getting advice.”
In order to protect their pots through periods of volatility, Zurich advises retirees to ensure their investments are sufficiently diversified both in terms of asset class (so equities, fixed interest, cash and property for example) but also by sectors and regions. This means that if one particular investment takes a hit, it only impacts a relatively small portion of your overall pot.
It can also help to hold one or two year’s income in cash. This means that if stock markets fall, you can spend your cash savings instead and allow your invested capital to recover without locking in losses and giving it the added pressure of generating an income too.
Alternatively, investors could choose to limit themselves to the natural yield of their pot – taking only interest and dividends and leaving their capital untouched.