Financial advisers lift the lid on the biggest concerns for retirees when taking advantage of the pension freedoms introduced in April 2015.
Three in four retirees say the biggest challenge they face when they come to access their pension is knowing how to construct an income-generating portfolio at retirement.
The finding was revealed by Aegon from a poll of 250 financial advisers, ahead of the fourth anniversary of the pension freedoms later this week (6 April).
Historically, people had no need to worry about how to generate an investment income, as the vast majority simply bought an annuity paying an income for life with their pension fund.
Changes introduced in April 2015 mean that retirees can now leave their fund invested and draw an income directly from it, but it is clearly an area where many people lack confidence and are particularly likely to look for professional input.
Income generation for DIY investors is a key focus for Money Observer. For instance, in the April issue we outline ways to generate a monthly income from stockmarket investing, part of our 10-page retirement planning special.
We also run six income-oriented model portfolios for investors with different risk profiles and timescales.
One of the key findings from the survey was that instead of using the freedoms to retire earlier, increased numbers (74%) of advisers’ clients are choosing a ‘phased retirement’, with only 20% going straight from their usual work pattern to full retirement. This trend was something that Money Observer wrote about in more detail recently.
Nick Dixon, investment director at Aegon, says: “The world of work is changing fast and retirement is increasingly a journey of change rather than an event. Since the introduction of pension freedoms, we’ve also seen a behavioural shift in the way retirees are choosing to take income in retirement.
“The freedoms have enabled individuals to adopt a more flexible transition into retirement, with people accessing pension savings to support a reduced working pattern.”
The survey also found that more than half (53%) of retirees are ‘cautious’ and therefore favour reducing risk at retirement rather than focusing on investment growth. In order to try to achieve this aim, multi-asset funds are the most popular fund type among clients of the advisers that participated in the survey, with 33% making use of them.
But, while someone approaching retirement may prefer to reduce risk, this may not be the best course of action, given that those in their early sixties could feasibly live for another 30 years.
For this reason, depending on the circumstances, some advisers advocate a more balanced approach, in order to give the pension pot potential to keep growing at a steady rate during retirement, as opposed to adopting a more capital preservation-focused stance.
In addition, the survey also found that for nearly four in 10 (38%), the greatest concern when leaving their money invested at retirement is the risk of running out of money in later life.
This finding is not entirely surprising, and indeed would have been the main concern retirees had when the freedoms were introduced, but the indications are that those taking control of their own savings during retirement are acting prudently rather than recklessly.
Last month, we reported that analysis of investor behaviour over the past year – a period that has been a difficult backdrop to navigate, given the pick-up in stockmarket volatility – found the average value of income withdrawal from pension funds in the wake of the 2015 pension freedoms is now 4.7%, a third lower than a year ago.
The finding was brought to light in a survey from AJ Bell, the pension provider. As the firm notes, this income reduction is a positive sign. This is because when stockmarkets fall and income withdrawals are maintained or increased, it is difficult for a fund’s capital value to recover.
That’s particularly so if you’re drawing on capital to maintain the required level of income when the market falls (as opposed to taking only ‘natural’ yield, in the shape of dividends and interest), as reducing the number of fund units makes it much harder for the fund to recover subsequently.
If you continue to draw income from the pension pot at that stage, a vicious circle is created, resulting in the value of the investments being weakened further. The phenomenon is known as pound-cost ravaging – the inverse of pound-cost averaging.