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How to prepare for decumulation amid a pandemic

This article is part of
How to navigate decumulation post-Covid

How to prepare for decumulation amid a pandemic
 Photo by Andrea Piacquadio via Pexels

The old saw of creating a robust plan and sticking to it despite the market noise makes sense. 

A pension plan has to stay the course and the underlying investments should not be chopped and changed because of every market movement or every panicky headline.

That said, the financial effects of a pandemic were unknown to us – even the best stochastic modelling could only have estimated at the collision of two black swans back in March 2020 (the Saudi/Russia oil price stand-off and the spread of Covid-19).

Thankfully, most pension portfolio modelling has withstood the barrage of market drops and bounce-backs over the past few months, clients have generally held their nerve and their pension pots are mostly back to pre-pandemic levels (at least on paper).

The virtues of creating solid plans, avoiding incessant tinkering and understanding the long-term goals of a pension cannot be underestimated. 

However, it is important that regular reviews are conducted because even if the markets had not been shaken clients and their own circumstances may have changed significantly. 

As a result, what they may have wanted from their decumulation strategy back in 2019 may not be what they need from it now in 2021. 

Alan Chan, director for IFS Wealth & Pensions, explains: "Decumulation plans should always be reviewed regularly to ensure income sustainability anyway, but arguably it’s even more important now than ever.

"A robust financial plan will have been stress tested to account for instances like high market volatility caused by the pandemic, but clients’ lifestyle will have changed a lot during the pandemic, and may even change forever."

This means that income withdrawals may need to be adapted and other assumptions, such as growth or inflation, may also need to be reviewed. Chan continues: "Clients' aspirations may have also changed, and perhaps [there is] a growing desire to bring forward some of their longer-term objectives, and they’ll want to know what’s feasible and what’s not."

Since the start of the pandemic, people have faced significant financial hardships, from government restrictions to stock market volatility and decreased employment prospects. These are just some of the factors weighing on pension savers’ minds when considering taking money out of their pension pot.   

According to Rob Yuille, head of long-term savings at the Association of British Insurers, it is more important than ever now to "go through the same processes as before the pandemic, to determine how best to access a pension".

He explains: "In the first instance, savers should try to use other sources of income to cover financial shocks as this will carry fewer long-term risks to people’s pensions. Also, pensions are typically invested in a range of assets; this means that over time, their value can go up and down."