Recession threat for drawdown investors

PENSIONERS who left their retirement savings invested via drawdown may be feeling nervous as the global economy flirts with recession and stock markets crash. US shares have fallen by almost a quarter this year, with other major indices falling as well, shrinking the size of pension and stocks-and-shares Isa savings.

Stock market volatility is less of an issue when you are building wealth for retirement, but once you stop working, it can ravage what you have built up over a lifetime.

That is not a problem if you lock into a lifetime annuity, but it’s a big issue if you stay invested, as most retirees now do. So is the nation facing a drawdown disaster?

TESTING TIME

The number of retirees choosing drawdown over an annuity has exploded since this option became easier following the reforms of April 2015. Drawdown allows pensioners to continue benefiting from stock market growth but it has yet to be tested in a full-blown bear market.

Share prices did crash in March 2020, in the early stages of the pandemic, but quickly recovered after central bankers flooded financial markets with stimulus.

Now they are doing the opposite, with the US Federal Reserve and Bank of England hiking lending rates last week.after two decades of bailing out investors with easy money, they are tightening fast.

DOWNSIDE

Pension freedoms allowed seasoned investors to take control of their money rather than buy a restrictive annuity, said Alice Haine, investment platform Bestinvest’s personal finance analyst: “Yet drawdown is far more complicated, as many pensioners face sometimes overwhelming decisions over where to invest their money, when to withdraw cash and how much to take each year.”

Some have withdrawn too much in one go, pushing themselves into a higher tax bracket, while others have taken too many risks with their funds or lost the lot to scammers offering get-rich-quick schemes, Haine said.

Today’s runaway inflation and bear stock market may present the biggest challenge of all. “Pensioners are having to take more money out of their pot to cover basic living costs, at a time when its value is falling.”

Take too much and you risk draining your pensions too quickly, Haine added. By contrast, with an annuity the income is guaranteed to last for as long as you do.

BE VIGILANT

Investing is a long-term game and drawdown savers should not sell-up at the first big setback, said Stephen Lowe, director at retirement specialist Just Group: “Stock market crashes are a fact of investing life.you should expect one sooner or later.”

Yet drawdown investors need to be vigilant. “They are guinea pigs in an experiment which started in calm conditions but have since turned more choppy,” Lowe said.

One or two bad years soon after you retire could deplete your pot quickly, especially if making large withdrawals to cover living costs. Lowe warned: “Before dipping in, work out whether your fund is big enough to sustain the income you want over the two or three decades that retirement typically lasts.”

The lucky ones will be able to take income from less volatile sources, such as the state pension, annuities, or a defined benefit final salary pension scheme. “These all shield you from volatile asset prices and the possibility of outliving your fund. Whereas with drawdown, your income depends on how well your investments perform,” Lowe said.

More than four-in-10 drawdown savers are making withdrawals at an unsustainable 8 per cent a year, double the rate considered safe, Financial Conduct Authority figures show. “Others take too little for fear of running out, and live poorer lives as a result. It’s hard to get the balance right,” Lowe said. If uncertain, Lowe suggested seeking guidance from the impartial government-funded Money Helper service, contacting Citizens Advice, or paying for independent financial advice.

‘Pensioners are having to take more money out of their savings pot at a time when its value may be falling’

FASHION SWINGS

Annuities could now swing back into fashion as rates have rebounded to a nine-year high, said Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey: “Someone with a £100,000 pension could now get £5,940 per year from an annuity, up from £4,495 in 2016.”

Yet annuities remain inflexible. “Once purchased, annuities cannot be unwound, so people are concerned about locking into poor rates for life.”

Morrissey said you do not have to annuitise your whole pension all at once: “You can annuitise in stages, which allows you to take advantage of better rates as you get older.”

Fixed-term annuities, which allow you to buy an income for as little as three years, plus a lump sum at the end of it, are increasingly popular, said Emma Byron, managing director at Legal & General Retirement Solutions: “As rates improve and economic worries rise, annuities overall will grow in popularity because they offer certainty and can be used to ensure essential living expenses are covered.”

Drawdown or annuity is not an either/or decision.a blend could give you the best of both worlds, whatever the global economy throws at us.