Drawdown investors who are taking advantage of the pension freedoms would be safer withdrawing a percentage sum in light of recent stock market turbulence, according to Aegon.
The provider’s regulatory strategy director Steven Cameron said the challenge of volatile markets can be particularly severe for those in early retirement, when pension pots are at their largest.
He pointed out that investors who take a fixed annual income each month end up reducing the size of their pension fund, which limits its ability to recover when markets bounce back.
Over the last six months, the FTSE 100 has fallen by 10 per cent, meaning drawdown investors have had a bumpy ride.
In August and September last year, markets also slumped severely, which saw savers lose more than £160m from their funds.
Mr Cameron said if the markets grow steadily at 4 per cent each year over the course of retirement, then a £225,000 pension pot from which a 65-year-old retiree withdraws an annual income of £13,600 will be exhausted by age 92.
“However, if the stock market falls 30 per cent over two years and they continue to withdraw £13,600 it will last to just age 80.
“This highlights just how important it is to adjust your retirement income to reflect the markets,” he said, adding drawdown investors may be safer taking a percentage sum.
“A fixed percentage of say 4 per cent 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.”
Bruce Moss, strategy director at eValue, said: “Today, at a time of market volatility with equities trending lower, the risks for retirees using drawdown are considerable.
“This is especially true if they are in the early years of retirement since their wealth could be eroded rapidly unless they reduce their income.
“This week, we would expect to see another spike in preference for guaranteed income as global uncertainty drives consumers to seek out the safe haven of annuities.”
Last week, a report found that volatility in world markets could have erased 8 per cent off the value of a typical drawdown fund since last April, when the at-retirement reforms were introduced.
katherine.denham@ft.com
