Draw pensions down carefully as shares crash

THE stock market crash could prove the first major test for retired people who have taken advantage of pension freedom reforms to keep their money invested in the market through income drawdown.

Reforms introduced in April 2015 waived the obligation to buy an annuity with your pension at retirement, freeing the over 55s to cash in their pensions, or leave them in the stock market to grow further.

The coronavirus has triggered the first major crash since the financial crisis and investors may find they have 10 to 15 per cent less money to withdraw than just a week ago, despite yesterday’s tentative recovery.

Andrew Tully, technical director at Canada Life, said those who draw money from their pension funds will be “crystallising” their paper losses and turning them into real ones.

That money will not benefit when markets recover, further depleting the value of your pot.

Tully urged savers to delay withdrawals by topping up their income from assets that have escaped the crash: “Many people hold a cash buffer, often around two years’ worth of income, and this could insulate you from recent falls.”

Alternatively, only withdraw the natural yield from your investments, rather than selling the underlying capital.

Tully said history shows that after significant falls, markets often bounce back quickly: “You may be in drawdown for 20 or 25 years, and should expect market volatility over such a length of time, but the risks are real and you need to plan for them.”

Romi Savova, chief executive of PensionBee, said making pension withdrawals now could inflict long-term damage to your wealth: “However, if your drawdown plan is properly diversified, with money in cash, property, gold and bonds, you will have automatic protection.”

Some pension plans automatically de-risk your portfolio as you approach retirement, moving steadily out of equities: “Those nearing retirement or already in drawdown may be surprised to find that their savings are already invested in lower-risk funds.”

Although annuities have fallen out of favour, buying one with part of your pension can offer peace of mind as they give you a guaranteed income regardless of what happens to stock markets.

This is not the time to make the shift, though. “Annuity rates are still low by historical standards, while cashing in your pension to buy an annuity after recent falls will buy you an even lower income,” Savova added.

Aviva head of savings and retirement Alistair McQueen said that while share prices are down roughly 10 per cent since the start of the year, they actually rose a similar amount in the final six months of 2019.

Also, the news headlines may not reflect your own situation, as they only report on major indices, such as the FTSE 100.

If you have other sources of income, such as final salary pension or rent from a property, McQueen suggested relying on them for a while, and pausing drawdown withdrawals.