Market volatility threatens to drain thousands of pension pots

New research from Zurich has warned that thousands of people in drawdown are not adjusting their pension income levels to account for market volatility, leading to fears they could drain their retirement pots too quickly.

Related topics:  Retirement
Warren Lewis
27th June 2018
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According to the study, 41% of people in drawdown are withdrawing the same amount from their pension regardless of how the stock market performs. With more than 431,000 retirees using income drawdown to fund their retirement, this means as many as 176,000 people could be impacted

Since pension reforms were introduced, twice as many retirees are choosing to 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. However, Zurich has found early evidence that consumers may not be aware of the need to consider adjusting their income in choppy markets, putting them at risk of outliving their retirement savings.

The study found that a third of people using drawdown have no hands-on investment experience and two in five (41%) have not received either financial advice or guidance. A further third claimed they were confident in their investment decisions, despite having no previous experience of actively investing.

To help consumers manage their retirement savings accordingly, Zurich is urging 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.

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

With more people selecting drawdown over annuities, the Government should introduce a UK-relevant safe withdrawal rate to help consumers manage their retirement savings accordingly. The Government Actuary Department 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.”

The research also found that one in ten (10%) UK adults not getting advice rely on search engines to help them navigate the complexities of drawdown, while one in five (20%) look at newspapers and magazines. Pension firms were the leading source of guidance for a third (35%) of consumers, though 44% of all those in drawdown confessed there is nothing that would prompt them to get advice or guidance.

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