Bigger rewards for retirees who remain invested

RETIREES who left their pension fund invested in the stock market through drawdown have reaped massive rewards from rising share prices, while those buying annuities are losing out as rates continue to fall.

The average pension fund grew a bumper 14.4 per cent last year, with positive growth in four of the five calendar years since pension freedom reforms were introduced in 2015.

Pension funds grew 15.7 per cent in 2016 and 10.5 per cent in 2017, although they dipped in 2018, falling 6.2 per cent.

In contrast, annuity rates fell in four of the last five years, including a sharp drop of 8.5 per cent in 2019, according to new data from Moneyfacts.co.uk.

DRAWDOWN

Head of pensions Richard Eagling said: “While those in drawdown have benefited from strong pension performance, people seeking the security of an annuity face considerably lower rates.”

Pension freedoms ended the obligation to buy a lifetime annuity, allowing people either to cash in their pensions or leave the funds invested for growth, triggering an immediate collapse in annuity sales.

Andrew Tully, Canada Life technical director, said drawdown is riskier than locking into an annuity and could backfire if shares crash: “The risk of running out of money is very real, as there are no mechanisms to prevent people from depleting their pots too quickly.”

ADVICE

Alternatively some retirees end up scrimping unnecessarily as they fear running out of money later. “Taking financial advice is important to get the balance right,” Tully said.

Despite rate falls, annuities still have attractions: “They now come with longer guarantees, and money-back options that were not there before.”

Splitting your pension between drawdown and an annuity could give you the best of both worlds, stock market growth combined with a steady retirement income. “You could buy an annuity in stages, rather than in one go. You will be offered higher income as you get older, especially if rates improve,” he said.

Whether you opt for drawdown or an annuity, always shop around for the best deal, Tully added.

Chase de Vere chartered financial planner Patrick Connolly said drawdown is attractive because you have greater choice over how and when to access your money: “Annuities are less flexible and lock people into what they see as a low income.”

He suggested combining the state pension, final salary workplace scheme, and an annuity to cover your basic living costs: “Once you have a secure income, you can put the remainder of your pension into drawdown.”

Connolly said drawdown has been supported by strong markets so far.

“However, if share prices fall from here, this option could look less attractive,” he warned.