The onset of the pension freedoms gave retirees more choice than ever over how to spend their pension pot, and many are making the most of that flexibility by opting for income drawdown, whereby their pension savings remain invested in the stock market. Yet this in itself can pose risks, particularly given how volatile the stock market can be, but luckily, investors don't seem to be put off.
What is income drawdown?
Let's start by looking at what income drawdown actually is. In a nutshell, it's a way for retirees to keep their pension savings invested – which means their pot could potentially continue growing – while allowing them to take an income from their savings when they need it.
For many it offers the best of both worlds, but there's no denying that it comes with risks. Not only could retirees spend their pot too quickly and be left with nothing for later life, but if they make the wrong investments, the value of their pot could fall rather than rise, making it even more difficult to sustain an income from their savings. The stock market itself is also notoriously volatile, but many investors appear to be holding their ground.
Accepting the risks
Research from Canada Life reveals that stock markets would need to shift "significantly" in one day before drawdown investors would be worried enough to think about moving their money – and even then, markets would need to fall by 7.5% on average to make them consider a move. Some are even more steadfast, with a third (33%) of respondents admitting they wouldn't make changes no matter how much the stock market fell in one day.
Among the 67% who would consider moving their money in the face of a mini-market crash, 59% would opt for a mixture of asset classes, and 21% would transfer their savings to cash. Cash becomes even more of a safe haven for DIY investors, with 25% likely to move their money to cash in the event of a stock market fall, compared with 18% who have an adviser relationship.
"The majority of drawdown investors show they will remain remarkably resilient in times of stock market volatility," said Andrew Tully, Canada Life technical director. "Far from knee-jerk reactions, our research suggests most people using drawdown to fund their retirements are sensibly taking a longer-term view."
However, the fact that more consumers could move into cash creates problems in itself, as Andrew goes on to explain: "As people move into retirement, it can become increasingly tempting to adopt a risk-averse stance and reduce exposure to stock markets… consumers will likely see cash as the safe haven in an increasingly blustery storm. But cash also carries its own risks, namely inflation and historically low interest rates, so settling for such poor yields exposes a pension pot in real terms.
"Making rash investment decisions without a plan can be wrought with danger. Seeking the help of a professional financial adviser can not only help consumers make properly informed decisions around retirement but can also ease the worry in turbulent times."
The research highlights the need for retirees to not only seek professional advice before making any decision with their life savings, but also to adopt a more blended approach when it comes to money management. While it's true that cash savings rates are low compared with the potential returns that can be achieved on the stock market, there's zero risk involved, which for many can provide vital security. Having said that, those who want to see their pension pot continue growing may want to take the risk with the stock market – it's all about personal preference, but getting advice is key.
Sam: 31st Jan 2019 11:05:00
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