The industry is split as to how yesterday’s market falls will affect recent retirees who opted to stay invested via drawdown after 6 April.
At the start of August, the latest figures from Iress showed that the number of drawdown contracts is up 72 per cent from this time last year, however, as global stocks slid yesterday (24 August) on a Chinese economic crisis, the relative safety of a guaranteed income may be looking rather rosy for some.
Duncan Jarrett, managing director for retail at Aegon, said that while market ups and downs are to be expected, this is difficult news for an adviser to deliver to a client retiring into today’s stock market.
“With an increasing number of clients opting for flexi-access drawdown on retirement, this downturn may have caused some painful losses at a time when people’s pension pots are at their largest and which can be difficult to recover from.
“Advisers and their clients have a couple of options, for those who have already moved into flexi-access drawdown, they can ride out the downturns and reduce the amount of income they take from their pension so that when markets recover, they benefit from the upswing.”
He added that those approaching retirement could also look at buying a flexible guarantee so that should markets fall they will be protected with a minimum level of guarantee.
Mark Polson, principal of platforms and specialist consultancy at the Lang Cat, told FTAdviser that whenever things get tricky, advisers quite rightly say ‘don’t panic’ and that it is a marathon not a sprint.
“The thing is, when you’re taking water out of a leaky bucket, the world can look much scarier than when you’re in accumulation.
“This is when advisers put their trust in the centralised investment propositions they’ve created, or have outsourced to.
“We haven’t seen yet whether most CIPs can withstand major movements during decumulation, so the next few months will be fascinating and very important for advisers who are considering creating what is inevitably going to get called ‘centralised retirement propositions’.”
However, Jamie Jenkins, head of pensions strategy at Standard Life, explained that many existing drawdown customers will have already worked with their advisers on this type of risk and, as such, will be holding a proportion of cash and other less volatile assets to ensure they can make withdrawals without touching equity based investments in the short term.
“New ready-made investment solutions introduced from April will also give many non-advised customers similar ways of mitigating such risks, without the customer having to take any immediate action.
“Customers purchasing an annuity will often have been invested in a lifestyle profile which has sought to dampen stock market risks by moving to gilts and bonds, in which case the impact of this week’s events will be far less pronounced.”
He added that the real risk is where a customer is seeking to sell out of equities now to purchase an annuity, inadvertently crystallising any short term reduction in value.
Nathan Long, head of corporate pension research at Hargreaves Lansdown, pointed out that the extent of any impact is dependent on the strategy used for income drawdown, either drawing the ‘natural yield’ or drawing income from capital.
His firm’s favoured approach is to draw only the natural yield derived from the investments within the pension, which should allow members to ride out the ups and downs of the stockmarket as fluctuations in the capital value become largely irrelevant, providing there is no cut to the dividends and therefore the natural yield.
“However, those who have adopted a strategy that relies on selling investments at regular intervals to provide their pension payments could now face problems.
“Being forced to sell shares when they have fallen in value means that members are eating in to more of their pension each time, this could lead to it being used up sooner than planned.
“The stock market fall highlights that drawdown is a higher risk strategy and should only be chosen by those who are fully aware of the risks. Many retirees will be well served with a mix and match approach to retirement; an annuity to provide secure income for the daily essentials and using income drawdown with any remaining pension for discretionary retirement spending.”
John Walbaum, a partner at pensions consultancy Hymans Robertson, added that if drawdown customers have structured in a sensible manner then the short-term impact should not be too significant - as people should always have enough income to sell assets for the first couple of years.
“The issue then becomes what happens long-term and how long it will take for markets to recover. Equities have been disappointing for a while now though, so the secret is just to make sure you don’t have to sell when volatility is against you.”
peter.walker@ft.com
