Caution revealed in pension freedom withdrawals amongst Brexit uncertainty
20 March 2019
New research has suggested that pension freedoms investors are acting cautiously amid difficult market conditions and Brexit uncertainty.
The findings revealed that, on average, regular annual pension freedoms withdrawals are 4.7% of the fund value, almost a third lower than a year ago, according to AJ Bell.
The pensions group said savers appear to be taking a sensible approach to market volatility, with expected investment returns down from 4.83% to 4.15%. One in 10 pension drawdown investors has experienced a significant drop in fund value since entering drawdown, with around half choosing to cut withdrawals as a result.
Tom Selby, senior analyst, AJ Bell, commented: “The fact many people are adjusting their investment expectations and cutting withdrawals in response to negative returns is an encouraging sign.
“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.”
As the pension freedoms approach their fourth anniversary in April, Selby said the majority of people aren’t entirely reliant upon their personal pensions to provide an income in retirement, suggesting “current withdrawal levels are not a major worry.”
He said: “Less than a third (30%) are relying on their personal pensions for over 40% of their annual income, while 40% of respondents say these withdrawals represent less than 10% of their income.”
Yet, despite savers reviewing and adjusting their retirement incomes in response to market movements, nearly a third have little idea of how their underlying fund is performing.
Three in 10 respondents admitted they didn’t know if they had experienced significant falls in their pension fund value since entering drawdown.
Selby warned: “A sudden dip in the fortunes in their investments – and there is no shortage of shocks right now – could turn a sustainable looking withdrawal strategy into a patently unsustainable one.”
The research also shed light on what investors were using the pension freedoms for, with the biggest chunk of cash going on day-to-day living. This was followed by luxury items such as holidays and new cars, while £1.4 billion was spent on paying down debts and a further £1.4 billion used to help children.
However, a substantial £3.3 billion was withdrawn and put straight into a bank account.
Selby added: “These savers face double jeopardy as they risk paying unnecessary tax on withdrawals and seeing the value of their pot eroded by inflation, particularly where their bank account pays 0% interest. They also miss out on the opportunity to grow their pot over the longer term by investing in the stock market.”
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