Why you should keep control of your pension drawdown

One
of the main advantages of Pensions Freedoms is that drawdown allows you to take
control of how much income you take, and when you take it. For example, you
might decide that you don’t need to take an income immediately, preferring to
leave your fund invested until you need to start making withdrawals.

While
drawdown offers a huge level of flexibility, new research has found that more
than half of individuals in drawdown are unaware that they can scale back or
stop withdrawals.

We
look at this latest research, and why it’s important that you retain control
over your pension in drawdown.

52% of retirees don’t know they can reduce their drawdown
withdrawals

If you want an income from your drawdown, you can choose
to take regular withdrawals or just dip into your pension pot when you need to.

Of course, there can be tax implications for withdrawals
– particularly if you’re looking to take a significant sum. Anything beyond
your 25% tax-free cash is usually be taxable and added to any other income you
receive in the same tax year, potentially pushing you into a higher tax
bracket.

While the choice of when and how to take income is
entirely your own, more than half of people in drawdown don’t know that they
can reduce or stop their regular withdrawals.

The survey by Zurich of 2,000 individuals who had unlocked their savings since the introduction of Pension Freedoms in 2015 found that half (52%) of over-55s taking an income in drawdown did not know they can reduce their withdrawals.

More than half of those questioned (56%) were unaware
they can stop them, despite flexible income being a key benefit of
drawdown. 

Zurich has warned that the results mean that retirees
could be taking unsustainable levels of income, meaning that their pension
funds could run out in retirement, particularly in the event of a stock market
downturn.

If share prices fall sharply, Zurich has warned that
investors risk falling into a trap known as ‘pound-cost-ravaging’.

What is ‘pound cost ravaging’?

Under ‘pound cost ravaging’, when stock markets fall,
retirees are forced to sell more investments to achieve their required income.
This can deplete pension funds quicker than expected, and poor investment
performance in the early years of retirement can quickly reduce the value of a
pension fund.

If individuals keep taking the same level of income from
their pension pot during this period, their fund can shrink much more quickly
than anticipated, making it very difficult for the fund to recover.

For clients drawing down money from their pension funds in retirement,
pound cost ravaging is a serious and often overlooked risk.

How
you can vary your drawdown income to avoid ‘pound cost ravaging’

Taking
a fixed level of income could see you struggle to sustain enough savings in
your pension pot to last you through your entire retirement. Flexibility could,
therefore, be crucial to you maintaining sufficient funds.

Alistair Wilson from Zurich adds: “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 withdrawals could seriously damage their savings
and deplete their pots too soon.”

One way that you can protect your portfolio against a
stock market slump and running out of funds is to hold up to two years’ living
expenses in cash. This has the effect of reducing the need to sell investments
when their value is falling, giving you a chance to ride out short-term bumps
in the stock market.

Alternatively, limiting withdrawals to the natural income
from shares or bonds, or stopping withdrawals altogether could help. This
approach leaves the underlying investment intact, giving it a better chance to
regain lost ground when markets recover.

Taking advice can help

The Zurich research also found a difference between those
who had sought advice and those who hadn’t. 

Just 35% of non-advised retirees understood they could
reduce their drawdown income, compared to 77% of people who had an adviser. 33%
of non-advised consumers were aware they could stop their drawdown income,
versus 73% of those speaking to an adviser. 

Alistair Wilson, Zurich’s Head of Retail
Platform Strategy, said:
“Investors are making complex choices in drawdown without fully
understanding how it works.  

“There is a critical gap in consumer awareness,
which could mean many of those who don’t have a relationship with a financial
adviser face poorer outcomes in retirement.  

“It’s crucial that people engage with their savings
in drawdown, ideally with the help of a financial adviser.”

The findings come on the back of research from the Association of British Insurers which revealed in June that a third (34%) of the 62,000 savers who accessed their pensions via drawdown for the first time last year didn’t take financial advice.

Get
in touch

Research has shown that seeking advice from an adviser can help you to better understand your retirement options. So, if you need advice on your retirement planning, email info@depledgeswm.com or call (0161) 8080200.

Please
note

A pension is a long-term
investment not normally accessible until age 55. Investment carry risk. The value of your investment (and the income from them) can go down as
well as up and you may not get back the full amount you invested. Past
performance is not a reliable indicator of future performance. The tax
implications of pension withdrawals will be based on your individual
circumstances, tax legislation and regulation which are subject to change in
the future.