Since 2015, retirees have had far more choice in how they access their pension. One of the options that has proven popular is using Flexi-Access Drawdown to get an adjustable income. However, as pension savings usually remain invested with this option, market volatility can be a concern.
What is Flexi-Access Drawdown?
It’s a way of accessing your pension flexibly. Your retirement savings will be invested, with varying degrees of investment risk available for you to choose from. You can then make withdrawals from your pension, adjusting the income as and when it suits you. As retirement has become more flexible, it’s not surprising that Flexi-Access Drawdown appeals to many. After all, the income you want to take at the start of retirement may be very different from what you need in later years.
During 2018/19, 32% of pensions accessed for the first time entered drawdown, figures from the Financial Conduct Authority show. This compares to 12% of pensions being used to purchase an Annuity, which delivers a guaranteed income for life.
Keeping a portion of your pension savings exposed to stock markets through investments gives them an opportunity to grow. Investment growth means savings have a chance to match or outpace inflation, maintaining your spending power. As it’s not uncommon for modern retirement to last 30 or even 40 years, investments can play an important role in long-term financial security.
However, this does mean your retirement savings are also exposed to volatility and short-term dips.
2020: Investment volatility
This year has seen the biggest dip in stock markets around the world since the 2008 financial crisis, due to the economic impact of the coronavirus pandemic. Markets started to take stock of events around 20th February, and in the period since then the value of the FTSE 100 had at one point fallen by as much as 30%. It’s been a similar story with stock markets in other countries too. As a result, the value of your pension may have fallen.
If you’re not yet making withdrawals and are still working, the volatility is likely to have little impact on your retirement plans. Pensions are long-term investments and short-term volatility is to be expected.
However, if you’re taking an adjustable income from your pension, it can be a bigger concern. In some cases, continuing to take the same level of income without considering market conditions can have an impact long term.
If the value of a pension falls but withdrawals remain the same, you’re forced to sell more units to secure the same amount of income. This depletes your pension quicker than expected and could mean long-term financial plans are placed at risk. This effect is known as pound cost ravaging and as you may no longer be contributing to a pension, the effect can make it difficult for savings to recover.
As a result, if you’ve opted for an adjustable income in retirement, keeping an eye on investment performance is essential.
What should you do if you’re affected?
1. Pause or lower withdrawals during the downturn
Despite the key benefit of Flexi-Access Drawdown being the ability to adjust your income, a surprising number of retirees aren’t aware this is an option. Previous research from Zurich found that 52% or over-55s taking an income in drawdown do not know they can reduce their withdrawals. Similarly, 56% aren’t aware they can stop withdrawals altogether.
Where possible, pausing or lowering withdrawals can help protect your pension. Assess how much income you need over the coming weeks and months and where possible put big-ticket purchases on hold. Once the stock markets recover, you’ll be able to increase withdrawals, confident that your long-term retirement plans are still secure.
2. Review your portfolio
It’s worth assessing the impact the current downturn has had on your pension. Headlines in mainstream media shouting that ‘stock markets have plummeted’ or ‘millions wiped off the value of shares’ can be scary. But keep in mind that a well-balanced portfolio will invest in other asset classes too. As a result, the impact on your pension is probably less severe than headlines suggest.
That being said, if you’re worried about investment volatility, reviewing your portfolio is worthwhile. We’re not suggesting that you make knee-jerk decisions to the downturn, that could harm your financial position even more. But taking some time to assess your goals, risk profile and attitude to investing can help you build an investment proposition that you’re comfortable with.
3. Build cash reserves to fall back on
You’ll often hear finance experts telling workers to ensure they have an emergency fund to fall back on when needed. It’s no different if you’re retired.
Having cash reserves means you’re in a position to pause pension withdrawals during a downturn. It can give you a greater ability to weather stock market storms. However, you do need to keep in mind that low-interest rates mean cash savings will be losing value in real terms when inflation is considered. It’s important to strike the right balance between holding an appropriate amount in cash reserves and investing.
How we can help
Please get in touch if you’re worried about your pension and retirement plans. We’re here to help you understand what investment volatility means for you and the steps that can minimise the impact. Our goal is to give you confidence in your retirement plans in the short, medium and long term.
Please note: 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.