Why Retirees Must Take Extra Care with Pension Withdrawals

People taking income from their pension pots are being unusually cautious at the moment, according to new figures. Economic uncertainty has prompted pensioners without a guaranteed income to spend less and take a prudent approach.

A significant drop in the UK’s level of pension withdrawals since last year may be linked to a decline in investor confidence, according to recent findings from pension provider AJ Bell. Over the past 12 months, pensioners with drawdown schemes have been taking an average of 4.7% of their pot – markedly down from the 6.4% they were drawing over the previous year.

Retirees have had more choice over how they draw their pensions since 2015, when pension freedom was introduced. This freedom has however increased the risks of some pensioners running out of money by drawing too much income over too short a period of time.

Tom Selby, senior analyst at AJ Bell, saw the drop in pension withdrawals as a positive sign, indicating growing awareness and level-headed thinking among pensioners. He said, ‘[Pensioners] appear to be responding sensibly to difficult market conditions and Brexit uncertainty. The fact that many people are adjusting their investment expectations and cutting withdrawals in response to negative returns is encouraging.’

Planning for turbulence

Taking a regular income from a pension is often essential for older people to cover their living expenses, but it could be worth trying to limit these withdrawals during periods of market turbulence. Generally speaking, it is more difficult for a pension fund’s capital value to recover from stock market falls if withdrawals remain at the same level (or increase) during the period of downturn, simply because there is then less capital available to generate new growth when the markets pick up again.

Financial advisers call this phenomenon ‘pound cost ravaging’ and warn that can wreak havoc on pensions, especially if it happens in the early years of a person’s retirement. Unfortunately, it’s not always easy for people who may already be on restricted incomes to reduce their spending still further every time the stock market dips. So what are the alternatives?

Tom had some words of encouragement for pensioners feeling the pinch, pointing out that the FTSE 100 is predicted to provide dividend returns of 4.9% in 2019. ‘This will, of course, rely on retirees taking sufficient risk and the underlying companies delivering the anticipated shareholder payouts. The majority of people aren’t entirely reliant on their personal pensions to provide an income in retirement, further suggesting that current withdrawal levels are not a major worry.’

Assuming that the FTSE prediction holds true and the markets escape further turbulence, then retirees may be able to untighten their belts in the near future. Another option may be to draw on non-pension savings (if available) during the lean years and then try to replenish these reserves during more prosperous times.

Find out more about managing pension drawdown

A pension drawdown scheme can provide a great deal of flexibility in retirement, and may even provide more income over time than an annuity, depending on your other circumstances and how long you live. However, the risks are much higher than with the guaranteed income of an annuity. To find out more about how to handle the more volatile aspects of a drawdown scheme, read our article Riding the Ups and Downs of Drawdown.

If you would like to talk about any of the issues in this article or need more general help with your finances, please get in touch with us.

This article first appeared on Unbiased.