“Those who have been relying on a pot of money - pension fund, Isa, portfolio - to provide their pension income may need to look at what basis they’ve been investing and withdrawing ‘income’. Those who have been chasing dividends rather than a total return strategy may be feeling the pinch for a while.”
Mr Smith-Hughes recommends that for those in drawdown, an assessment of the sustainability of income should be undertaken, using a cashflow modelling tool, based upon current values and income levels.
Depending on the result it may be necessary to reconsider the income level being taken, which may or may not be straightforward. If the client is fully invested and needs that level of income then options may be limited.
“It’s important to remember that income needs could also be affected by the current situation as people may be spending less for a little while and that could help to ease the pressure on income requirements,” Mr Smith-Hughes adds.
“Annuities, the main alternative to drawdown, should always be a conversation advisers have with clients, both at the outset when starting to take income but also when reviewing an existing drawdown.
“With fund values and also annuity rates at low levels this may seem unattractive, but is still an important step to consider as it’s not an all or nothing scenario. And of course, any change in the client’s health should be ascertained as this can clearly have a big impact on the rate available.”
While Covid-19 has most definitely had an impact of asset values, Gary Smith a chartered financial planner at Tilney, says this does not necessarily mean that retirees need to amend the income they take from their pensions.
“Like most of the population, retirees will have faced lockdown and isolation restrictions, and this will most likely have resulted in a reduction in their regular expenditure, especially as travel and social expenditure will have reduced,” Mr Smith adds.
“Therefore, it could be that, rather than needing to retain the same level of income, they can reduce the income they need to reflect their reduced expenditure.
“After all, the surplus income would probably end up being retained in savings, at a time when interest rates are low and retaining capital in their portfolios, as asset values recover, could be more beneficial.”
Taking income less regularly
He also suggests that some clients opt to take their income annually or as lump sums and, as an alternative to taking this at the start of the tax year, they could benefit from converting to taking monthly income, as this would reduce the potential impact of ‘negative pound cost averaging’, potentially enabling the investment values to recover.