Taking pension lump sum could be disastrous

Anyone considering taking advantage of pension freedoms needs to think carefully whether this is a good time to take money out of the stock market. The recent collapse of share prices around the world mean that cashing in now could be disastrous for your retirement income prospects.

In the past five days the FTSE has fallen more than 6%, and in the past year it has fallen more than 10%. During better days, the market peaked above 7,000, while in the past week they have dipped beneath 6,000. The intervening weeks have seen an unusual amount of volatility as the market deals with an uncertain global economy and pressure from China.

Worries
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Anyone with money invested in stocks and shares through their pension is likely to be concerned, because on paper they could have lost 10% of the value of their pension pot. It might lead some people to worry that their money should be somewhere less volatile. However, this is dangerous thinking. Leaving the market at a time like this simply crystallises your losses and turns a theoretical paper loss into a real financial one.

If you left the market in the aftermath of Black Monday, you would have missed out on the bounce that happened over the following 24 hours. Of course, there's no guarantee that the market will continue to rise from today, but by leaving your money in the market you have a decent chance of enjoying a recovery. By removing your money at the bottom you are guaranteeing that you will miss out.

Danny Cox, a chartered financial planner with Hargreaves Lansdown told AOL: "There's a natural inclination for people to be unsettled when markets are volatile, but often the best thing is either to do nothing, or if you are more adventurous, consider putting more money into your pension when stocks are cheaper."

Lump sum

If you have a while until you reach retirement age, the advice from the experts is to sit tight. But what if you are over 55 and considering taking a lump sum?

Cox warned that you need to think about this carefully too. Since the beginning of the market crash, the overall value of your pension fund will have typically lost 10%. If you take a lump sum out of your pension now, you will be taking a larger proportion of your savings, so less will remain in the market to take advantage of growth further down the line, and you will be left with less to call on later.

He explained: "People need to understand where their pension is invested, and the impact on their pension pot if they take a lump sum now when the market has fallen so far."

It doesn't mean nobody can afford to take any kind of a lump sum, but it means they shouldn't rush into any decisions, and need to be aware just how big a proportion of their pot they will be cashing in, and the long-term effect of their decision.

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