Drawdown  

Warning sounded on drawdown amid market falls

Warning sounded on drawdown amid market falls

Non-advised pensioners could see their later life savings eroded if markets continue to fall while they are drawing down funds for retirement, a provider has warned.

Prudential called on retirees to consider reducing the amount of money they withdraw from their pensions as volatile markets early on in retirement could accelerate losses in solutions such as income drawdown.

The FTSE 100 was down throughout yesterday and today (6 February) after markets tumbled in Asia and the US. 

Article continues after advert

Jitters already emerged last week, meaning this could be the first time post-pension freedom retirees experience a sustained period of market falls.

The problem is more pronounced these days as pension freedoms gave scores of people access to drawdown solutions for the first time, many entering the products without seeking advice.

Vince Smith-Hughes, retirement expert at Prudential, explained taking regular income when markets are falling or volatile means more units are sold to provide income, which in turn erodes capital, a phenomenon known as pound cost ravaging.

At the same time, investing regularly when markets are volatile can boost overall returns as more units are bought each month when unit prices are low, he said.

There is also sequencing risk, which means more money is lost when markets are down in the early years of a drawdown plan than if the same happens in the later years - given money is being drawn from the fund at a higher rate than the fund’s natural income.

Mr Smith-Hughes said: "Pensioners need to take a flexible attitude to how much money they should take from their funds.

"Withdrawing money when the value of underlying assets falls can lead to people exhausting their retirement funds much more quickly than they expected.

"If the stock market falls during the early years of retirement, pensioners should be prepared to reduce how much money they withdraw from their funds or they might never recover their value."

It is unlikely advised clients would face the same problems as they would have contingency plans in place, said Alistair Cunningham, financial planning director at Wingate Financial Planning. 

He warned against tinkering with an investment strategy at this point.

He said: "We plan for annual downturns well in excess of what has been experienced in the past week. I struggle to even entertain a discussion on why an individual should change strategy based on what is currently happening.

"Most of my clients will either have their needs covered by guaranteed sources, or will have somewhere between one and three years of funds in cash."

Fellow adviser Neil Liversidge, managing director at West Riding Personal Financial Solutions, shared this view.

He said: "The way we organise drawdown we can sustain 12 to 18 months of income payments from the client's portfolio without undue depletion of holdings and beyond that we ensure all drawdown clients have a self-managed buffer fund."

£100,000 starting fund. No withdrawals

David’s returns

Les’ returns

Vince’s returns

Year 1

25%

Year 1

-5%

Year 1

25%

Year 2

5%

Year 2

-20%

Year 2

-5%

Year 3

20%

Year 3

-15%

Year 3

5%

Year 4

-15%

Year 4

20%

Year 4

-20%

Year 5

-20%

Year 5

5%

Year 5

20%

Year 6

-5%

Year 6

25%

Year 6

-15%

Final amount: £101,745

Final amount: £101,745

Final amount: £101,745

£100,000 starting fund. £5,000 a year withdrawals (£417 per month)

David’s returns

Les’ returns

Vince’s returns

Year 1

25%

Year 1

-5%

Year 1

25%

Year 2

5%

Year 2

-20%

Year 2

-5%

Year 3

20%

Year 3

-15%

Year 3

5%

Year 4

-15%

Year 4

20%

Year 4

-20%

Year 5

-20%

Year 5

5%

Year 5

20%

Year 6

-5%

Year 6

25%

Year 6

-15%

Final amount: £77,007

Final amount: £64,017

Final amount: £75,019

Figures: Prudential. Payments monthly in advance, returns are after all charges