Analysis has found the average withdrawal under the pension freedoms is 4.7% - a third lower than a year ago.
With freedom comes responsibility, and the indications are that those taking control of their own savings during retirement are acting prudently rather than recklessly.
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 – has 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 findings were 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 phenomena is known as pound-cost ravaging – the inverse of pound-cost averaging.
Tom Selby, senior analyst at AJ Bell, says: “Pension freedoms investors appear to be responding sensibly to difficult market conditions and Brexit uncertainty. The fact many people are adjusting their investment expectations and cutting withdrawals in response to negative returns is encouraging.
“With the FTSE 100 expected to provide dividend returns of 4.9% in 2019, investors may be able to apply a ‘natural yield’ strategy and maintain their lifestyle in retirement without eroding their capital. This will, of course, rely on retirees taking sufficient risk and the underlying companies delivering the anticipated shareholder payouts.”
Money Observer has previously highlighted that four years on from the pension freedoms the signs are that not of reckless spending on fast cars, but of misguided conservatism. According to a report by the Financial Conduct Authority (FCA) last year a third of people making full withdrawals play it safe, putting most of their pension cash in savings accounts in case they might need it in years to come. Those who do this, though, have little chance of even keeping up with inflation, let alone growing in value.
To address this issue the FCA is consulting on new rules, which (if introduced) will require pension companies to offer non-advised retirees four ready-made investment solutions, so-called investment pathways, depending on the financial objectives for their savings. The FCA also wants to scrap cash as the default option for those who do not specify where they want their money to be invested when they move into drawdown.
Research by Killik, the wealth manager, also concluded those taking advantage of the pension freedoms have been doing so in a careful manner. A survey carried out by the firm found that pre-retirees aged 55-65 have largely refrained from cashing-in large sums due to fears of running short in retirement, pension scammers and financial advisers’ partiality.