Thousands of investors who have taken advantage of pension freedom rules will have to review their retirement income strategies in light of the coronavirus sell off, according to leading pension experts.
These warnings come ahead of this weekend’s fifth year anniversary of these new rules. Pension freedoms were introduced by the then Chancellor, George Osborne, allowing all pension investors over the age of 55 access to their pension pots.
Since this change savers have withdrawn almost £33 billion from their pension funds. Around 150,000 investors have chosen to keep their pension fund invested beyond retirement, and take an income via drawdown.
A new survey by AJ Bell, suggest that these pension freedom withdrawals now equate to an average of around 4.4 per cent of the pension fund – a rate which may be unsustainable, given current market falls.
However AJ Bell points out this rate has fallen in recent years, from an average of 4.7 per cent a year ago, and 6.6 per cent in 2017.
The survey also found that these withdrawals represent around a third (32 per cent) of total income , with over two-thirds (70 per cent) of respondents saying they represent half their income or less.
Only 50 per cent of those surveyed said they were worried about running out of money during their retirement.
This research was conducted among those entering drawdown for the first time, and takes place in February and March each year.
AJ Bell senior analyst Tom Selby says: “Those investors who chose to stay invested while taking an income through drawdown face their biggest retirement challenge yet.
“Although it is difficult to judge the sustainability of withdrawals without knowing people’s individual circumstances and overall wealth, a market characterised by people taking an income of between 4 and 5 per cent who tend to have multiple sources of income may appear of little concern – particularly during a period where markets have risen at a healthy rate.
“However, the coronavirus sell-off has changed everything, ripping a double-digit hole in millions of savers pension plans. While those who are building a retirement pot should have decades for their funds to (hopefully) recover value, people drawing an income already will likely have to adjust their spending expectations.
“This will particularly be the case for people in the early years of retirement who took significant withdrawals from their fund just as the current crisis hit. This combination of big withdrawals and negative investment performance – often referred to as ‘pound-cost ravaging’ – can wreak havoc with people’s retirement plans.
“While it may be tempting for some to plough on regardless, such an approach will leave you at significant risk of running out of money.”
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