Individuals that invested in a global equities fund when pension freedoms were introduced in 2015 could have seen their pot grow by 16 per cent, despite drawing income.
Pensions freedoms were introduced in 2015 and allow individuals to access their pensions in any way they like from age 55.
This means people who may previously have retired on an annuity now have access to complex income drawdown products.
Analysis from provider Aegon of stock market returns since April 2015, published today (July 22), showed that savers who invested in global equities would have seen their pension increase beyond its original starting value, despite entering drawdown, whereas those investing in UK equities or fixed interest would have seen their savings decrease.
The pension provider’s analysis was based on an individual with a £400,000 pension pot taking an annual income of £20,000 from April 7, 2015.
The research centred on the performance of four benchmark portfolios which covered a mix of UK and global equities and bonds.
Aegon found that if a £400,000 pension pot was invested on April 7, 2015 in an ABI Global Equities fund, it would have increased by £62,000 (16 per cent) after four years, despite £80,000 being withdrawn over the same period.
However, if the individual had invested in an ABI Global Fixed Interest or ABI Mixed Investment then their pot would have decreased by 8 per cent to £367,000 and £369,000 respectively.
Investing in an ABI UK Equity Income fund would have seen the pot decrease by 3 per cent to £390,000.
The analysis also found that the individual would have seen the value of their savings fluctuate between £330,000 (worst performance) and £488,000 (best performance), if invested in ABI Global Equities – a difference of £158,000 (48 per cent).
The same retiree invested in ABI UK Equity Income could see a variation in value of £88,000, while the ABI Global Fixed Interest will have experienced a fluctuation of £72,000.
If the individual opted for a mix of equities and bonds, by investing in the ABI Mixed Investment 20%-60% Shares, then the fluctuation would have been a maximum of £50,000 in the past four years.
| ABI Mixed Investment 20%-60% Shares | ABI Global Equities | ABI Global Fixed Interest | ABI UK Equity Income |
Highest point | £405,000 [April 15] | £488,000 [August 18] | £434,000 [October 16] | £427,000 [May 18] |
Lowest point | £355,000 [February 16] | £330,000 [February 16] | £362,000 [November 18] | £339,000 [February 16] |
Difference | £50,000 | £158,000 | £72,000 | £88,000 |
Value at April 7, 2019 | £369,000 | £462,000 | £367,000 | £390,000 |
Income taken | £80,000 | £80,000 | £80,000 | £80,000 |
Figures rounded to the nearest £1,000
Nick Dixon, investment director at Aegon, said although pension freedoms offered benefits, such as the potential for savers to continue investment growth into retirement, forming the best retirement strategy was complicated.
Mr Dixon said: "Markets have generally performed well since the introduction of the freedoms, but even so, some of the swings in value have been quite significant.
"People who opt for drawdown need to be comfortable that the investments they’re holding match their risk appetite and should reassess the investments they hold and the level of income they take from their savings at regular intervals.
"These decisions can be complex and it can be beneficial to seek professional financial advice. Doing so is likely to provide extra confidence in the event that the value of your investments does fall as you’ll know that they have been selected as part of a long-term plan tailored to your goals."
Earlier this month (July 1), charity Age UK warned that many older people were making risky decisions when entering drawdown and were lacking access to appropriate products.
Age UK had investigated the development of retirement income products, customer support, and industry thinking since the pension freedoms came into effect.
It found many older people were unaware that they needed to factor in tax bills and state benefit rules when accessing their pension pot and found it challenging to understand the flexibilities.
The charity warned savers with small to medium-sized pension pots were particularly lacking access to good-value and appropriate products and did not have the tools to manage their money effectively.
amy.austin@ft.com
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