Return sequencing risks are undermining retirees’ savings, Tideway Wealth has warned.
Drawdown investors who are invested in a single account where withdrawals are funded by selling a single unitised fund, or across all funds in an insured pension or model portfolio, could be putting themselves at risk of not being able to afford their retirement, the firm said.
Retirees with these drawdown products will be at the mercy of market downturns as they are forced to sell more assets at a discount in order to fund withdrawals, which substantially impacts long-term returns, according to Tideway Wealth founder James Baxter.
As an example, Baxter says a long-term investor with a £500,000 investment pot over 25 years in a typical volatile equity fund would deliver returns of around 8% per annum. In contrast, a £500,000 drawdown investor account withdrawing £25,000 per annum, escalating by 3%pa investing in the exact same fund, would see an annual return of just 3.9%. The result is that the drawdown investor gets less than 50% of the long-term return of the equity fund.
Baxter said: “The impact is substantial and this is something that was identified in the recent FCA review. Drawdown investors may be tempted into more risky investments like equities attracted by the long term returns these markets have historically made but through a combination of their income withdrawals and their drawdown account processes they just won’t get anything like those returns going forwards. They will have all the same risks but not the same long-term rewards.”
Tideway has launched a new Dual Account Drawdown service to enable its clients approaching and in retirement to navigate the impact of stock market volatility on their investment portfolio by splitting the pension pot into two separate investment accounts that can be accessed independently to make withdrawals.
It has also created a calculator to help show how the two accounts work in a projection of account value during retirement based on planned withdrawals.
