Clients approaching retirement have been scrambling for advice amid concerns they face “catastrophic” short-term pension losses due to the growing coronavirus crisis.
The spreading pandemic has toppled global markets as governments established lockdowns and imposed travel bans. Advisers have been stressing the importance of their existing plans to clients, but some have expressed concern over client reactions.
Philip Milton, a financial adviser and a discretionary fund manager at PJ Milton and Co, said the situation was “catastrophic” for anyone who had invested “sensibly in accordance with their needs” up until a matter of weeks ago and was looking to retire.
He added: “Nothing can be said to diminish that impact for anyone, and liquidations in the face of such acute conditions are not wise.”
Alan Lakey, adviser at Highclere, said he anticipated a “huge cancellation of paying into non-essential plans such as pensions or savings schemes”, stating: “I’ve already had many calls. These seem to fall into two camps: people who are still saving for when they reach pension age, and people in drawdown.
“Some of the first have said they wish to suspend contributions and there may be some sense in that, as living today is of prime importance.
“The people in drawdown who have seen fund values plummet may opt to reduce or suspend income. This may also be the case for those drawing on large Isa or other invested funds.”
The FTSE World index and the IA Global sector have each dropped around 20 per cent since mid-February. Clients invested in a typical balanced portfolio have seen more than 10 per cent knocked from their pot over the past few weeks. The IA Mixed Investment 20-60% Shares sector, home to many multi-asset funds has dropped about 12 per cent since February 17.
Sequencing risk — the fact that the capital value of a pot can erode significantly if ‘negative years’ arrive during the early years of drawing down on a portfolio — would exacerbate this risk.
This means those having to draw from their retirement pot may wish to limit the amount they are taking during a period of major market falls.
As an example of how drawdown can go wrong, Andrew Clare, professor of asset management at Cass Business School, said a retiree with an average pension pot of $100,000 (£81,600) in 2000 who had consistently drawn down from their pension would have seen their pot depleted within 15 years due to the tech and financial crashes.
He said: “This chart shows the impact of someone who has withdrawn $500 (£408) per month from an investment pot initially worth £81,600 [in falling markets].
“Because of sequencing risk, they would have run out of money in 2016 — about the same time you run out of money from investing in a shoe box under your bed.”
The same sort of dangers will present themselves to those persisting in drawing down income over the coming months, should markets continue to falter.