How to manage drawdown during the pandemic

This option gives more time to rebuild the pension pot, more time to benefit from employer contributions and less time in retirement for the pot to last.  

As Steve Webb partner at pensions consultant LCP explains, for those at state pension age, each year of deferral adds 5.8 per cent to the rate of pension when it comes into payment. 

Mr Webb adds: “For those who have recently retired, it is not unusual for people to partially 'un-retire' and do some paid work if it is available. This may have many advantages and can help soften the blow of a fall in drawdown pots. 

“For those well into retirement for whom going back to work is not an option, keeping drawdown withdrawal rates under regular review is vital, and some providers offer tools to help work out what a sustainable rate would now be.”

Alternative income source

Another option could be to dip into cash savings first.

Claire Trott, head of pensions strategy at St James’s Places says: “If you can, you should try to avoid taking money from your investments during periods of volatility. 

“If you can reduce your level of pension withdrawals or even put them on hold for a while. It could be better to dip into cash savings, rather than sell investments you might hold outside your pension plan. The more you can leave invested, the more time it has to hopefully recover.

For those who have recently retired, it is not unusual for people to partially 'un-retire' and do some paid work if it is available.--Steve Webb

“Alternatively, if you are currently taking your annual income requirements as a lump sum, consider changing to a monthly or quarterly withdrawal to reduce the risk of realising capital during this market trough.

“If you’re eligible to start drawing it, your state pension could also provide some income without the need to sell investments.”

At Royal London Lorna Blyth, head of investment solutions says the firm has been seeing an increase in the number of customers who are deferring taking income or reducing the amount of income they had originally planned to take.

She adds: “Withdrawing money from investments when markets are down means there is less invested and so you will benefit less when the markets do recover.” 

Pete Glancy head of policy at Scottish Widows says: "In order to take money out you will need to sell units in your investments and if the prices are low, you will need to sell a higher number to get the desired amount.

"This means that there will be fewer units later that you can use to take more income or buy a guaranteed income for life. If you can’t afford to wait you should therefore consider only taking as much as you need short-term."

In drawdown

For those who are already in drawdown, the implications of sharp falls in the stock market are very different and much more immediate from those who are still saving for retirement.

Steven Cameron, pensions director at Aegon says while advisers and clients may wish to review where the funds are invested, the most pressing priority is likely to be to review the amount of income being taken.

To illustrate his point, Mr Cameron explains with the FTSE having been down at times by around one third from its peak, a withdrawal of a fixed amount today will represent a higher proportion of the total fund. 

For example, someone with a fund of £300,000 pre-fall may now have £200,000. 

A withdrawal of £1000 a month, or £12,000 a year represents 4 per cent of fund but that same withdrawal now equates to 6 per cent of fund. 

If the individual is relying on their drawdown fund for a lifetime income, even 4 per cent withdrawals risk running out of money and 6 per cent has a high risk.

If the individual is in a position to reduce or even suspend withdrawals for a temporary period, this will avoid depleting the fund more than is necessary while stock markets are depressed, giving greater potential to benefit from future increases in the stock market. 

In the above example given by Mr Cameron, one approach would be to change the withdrawals to be the same percentage of fund. 

Four per cent of £200,000 is £8,000 a year or £667 a month, a third less than previously.

Taking the full tax-free lump sum when stock markets have fallen means individuals will not only be taking a quarter of a lower amount, but they will be losing the chance of benefiting should markets rise again. 

Withdrawing money from investments when markets are down means there is less invested and so you will benefit less when the markets do recovers.--Lorna Blyth

They may be able to take a smaller tax free lump sum now and further tax free entitlements later through their retirement. 

Mr Cameron adds: “If the individual does have some of their drawdown investment held in cash, then advisers may advise their clients to take an income from this part which will not have fallen in value.

"This leaves the equity element untouched, leaving open the potential for this to benefit fully from future stock market rises.

“Another option would be to consider taking an income from any cash savings outside of pensions, while avoiding using up all liquid assets. 

“Advisers have always been able to add value by considering an individual’s broader investment and savings portfoIio in retirement, and where best to take income from first, allowing for tax and inheritance implications, as well as market conditions.

“Advisers have a hugely important role to play in talking their clients through these issues. Avoiding panic measures which, while they might appear sensible to the client, could do significant harm longer term.”

Andrew Dixon, head of wealth planning at Kleinwort Hambros adds: “Most clients close to retiring will, or should, have accrued some form of certainty over their cashflow to meet expenditure in the early years of retirement. 

“A client approaching retirement is unlikely to have full exposure to equity markets within their retirement fund so will be less impacted than perhaps they think. The aim of a good retirement planning is to think a number of years in advance.”

Accessing funds

If a client wants to go ahead and access their pension pot before markets have recovered Ms McIntyre says the approach she takes is to remember that the customer has every right to progress with their plans.

She adds: “It’s the job of the firm to guide, advise, challenge, but creating informed decisions is about supporting the customer.

A client approaching retirement is unlikely to have full exposure to equity markets within their retirement fund so will be less impacted than perhaps they think.--Andrew Dixon

“If the customer can set out their plan, what is in that plan for them, what might go wrong, how they will spot if the plan starts to go wrong and can set out what they will do if the plan does go wrong; if they can do this using their own language, if this plan clearly reflects their values, objectives, needs and wants, then surely it is evidenced they have made an informed decision. 

“This can surely be true, even where our personal recommendation may differ.

“With all of this in mind then the key is that the pension pots are accessed in a way which avoids realising the growth assets at a time when it could be considered they are undervalued: remembering not one of us really knows where stock markets will be in a year, three years, ten years.

“There are so many intangibles all we can do is talk through the considerations with our customer, provide guidance, personal recommendations, recognising these must reflect the customers values, objectives:  needs and wants.”