Stock market falls could spell disaster for those who used pension freedoms

Sarah Coles
China Financial Markets
China Financial Markets

Pension freedoms always came with risk: there was always the chance that people could take the money and blow the lot, get ripped off by scammers, or invest it in something wholly unsuitable. Now the experts are warning that even those who withdrew their pensions cash for what they thought were very sensible investments may face a nasty surprise.

Patrick Connolly, a Certified Financial Planer at Chase de Vere, says those who withdrew their pension pots and invested in the stock market may have thought they were making a wise and careful decision. However, recent falls in markets around the world may have had a devastating effect on their investments. The FTSE 100, for example, has fallen 11%.
Of course there will be those who made a careful decision to invest in the stock market, based on an understanding of the risks. They will have plenty of money set aside so they do not have to touch the portion invested in shares for years - allowing it plenty of time to recover.


However, there will be others who Connolly says: "Might not have sufficient disposable income or other assets to make up for any investment losses." It means they will need to withdraw some of the money from shares in order to pay for their day-to-day costs, which will crystallise their losses.

For some investors this could be further compounded, by the structure of how they are funding their retirement. If, for example, they planned to leave it invested and live off the income and rising value, then they could have found it impossible during market turmoil, and dipped into their original investment.

Hargreaves Lansdown did the maths for the period between 2000 and 2010 - a tough time for the stock market. It used the example of a 65-year-old man with £250,000 of pension savings who went into a drawdown arrangement - withdrawing £15,000 a year (the same as the amount he would have received from buying a level annuity).

Within three years, a combination of market falls and cash withdrawals would mean his pension pot had halved in value. After ten years it would be worth just £102,000, and if he bought an annuity at that stage he would have received just £8,200 a year.

Connolly says anyone approaching retirement needs to factor the possibility of a period of market falls into their calculations. He adds: "Just because pension freedoms are available, it doesn't necessarily means that people should use them. As a starting point, most people should make sure they have a secure income - from the state pension, defined benefit schemes and lifetime annuities - to meet their basic living costs." Beyond that, people have the freedom to make the purchases and investments they decide are best for them.

He suggests that given these risks, it's well worth considering getting independent financial advice from a professional as you approach retirement - so you can understand all the options, all the risks, and make the decision that suits you best.

Avoiding Panic When the Stock Market Falls
Avoiding Panic When the Stock Market Falls