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Cash buffers ‘thrust into spotlight’ by Covid

2 September 2020

Cash buffers implemented in financial plans have been essential in protecting clients’ retirement income during the Covid-19 crisis, new research from Aegon and Next Wealth has shown.

In a survey of 227 advisers, 84% said they use a cash buffer when investing to protect their clients’ income. Six out of 10 (58%) advisers using cash buffers – money that sits outside of cash holdings within funds or portfolios – said they typically allocate one to two years of income to cash. One in 10 (9%) went further by allocating three to four years of income to cash.

The research also found that half of advisers (50%) make withdrawals from cash and replenish it as part of a broader portfolio review, while a fifth (20%) make withdrawals from other assets and only rely on cash in emergencies, such as an economic downturn.

Steven Cameron, pensions director, Aegon, said cash buffers were a “distinguishing feature” of retirement investing which have been ‘thrust into the spotlight’ due to the Covid-19 pandemic.

Cameron said: “Recent market volatility from the pandemic has put the need for cash buffers into the spotlight. In the first three months of lockdown the FTSE 100 was around 1,000 points below where it stood during the same period the previous year, so the value of some pensions may have fallen 15% depending on their investment mix.

“The money withdrawn during a downturn represents a larger proportion of the pension pot, so advisers will have turned to cash buffers to avoid selling assets at depressed prices. Those without this protection may have found themselves caught out and having to rely on other options while markets recover.”

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