Market turmoil nightmare for those who used pension freedoms

Updated
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gold coins in a jam jar. the...



Savers taking advantage of the new pension freedoms to take out drawdown pension plans may be wishing they'd stuck to an annuity instead.

Income drawdown schemes allow savers to take out up to 25% of their pot as a tax-free lump sum. The rest stays invested, with income drawn directly from the pension.

However, the current turmoil in the stock market has seen the FTSE 100 fall by almost 10% in the last six months, and retirement specialist Retirement Advantage says that as much as 8% could have been wiped from the value of a typical drawdown fund since April 2015.

"The challenge of volatile markets can be particularly severe for those in early retirement when pension pots are at their largest," says Steven Cameron, regulatory strategy director at life insurance firm Aegon.

"If people continue to take a fixed monetary sum each month, they end up reducing the size of their pension fund and limiting its ability to recover when markets bounce back."
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In a a hypothetical scenario in which markets grow steadily at 4% each year over the course of a retirement, he says, a £225,000 pension pot from which a 65-year-old retiree withdraws an annual income of £13,600 will run out when they reach the age of 92.

However, if the stock market falls 30% over two years in early retirement and they continue to withdraw £13,600, that same pot will only last until they're 80.

"This highlights just how important it is to adjust your retirement income to reflect the markets. Rather than taking a fixed annual income, drawdown investors may well be safer taking a percentage sum," he says.

"A fixed percentage of say 4% may offer a more variable income, but it prevents the investor from exhausting their savings in those periods where the value of their savings is falling and could benefit them longer term."

Meanwhile, Retirement Advantage is recommending that pensioners sit tight if they possibly can and keep their savings where they are. If not, it suggests using a blend of annuities and drawdown.

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"You can secure a guaranteed income to pay the bills, and this allows you to adopt a longer-term strategy for the growth element, giving flexibility to ride out stock market storms," says pensions technical director Andrew Tully.

"Adopting the blended approach can help protect you from market falls as you won't necessarily need to draw an income from the investment pot, while you can enjoy any upside when markets do well."

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