Five things to know before accessing pension freedoms

During the first bear market since they were introduced

Beware big income withdrawals during falling markets.

Selby continued: “We are experiencing the first bear market – characterised by falls in stocks of more than 20% – since the pension freedoms launched five years ago.

“The covid-19 pandemic and global economic shutdown has brought into sharp focus the importance of understanding the investment risks you are taking and managing withdrawals sustainably.

“This is particularly the case where large withdrawals come at the same time as big falls in markets, a phenomenon often referred to as ‘pound-cost ravaging’.

“As an example, someone taking a 5% inflation-adjusted income from their fund who suffered a 20% hit as a result of the covid-19 outbreak in their first year of drawdown, and 4% growth thereafter, could see their pot run out after 18 years – three years sooner than if they suffered the hit 10 years into retirement.

“To put this into context, whilst on average life expectancy at 65 is 18.6 years for men and 21 years for women, a man has a one in four chance of living another 27 years, while a woman has a one in four chance of living another 29 years.

“Savers wanting to manage withdrawals sustainably and avoid selling down their capital at a low point in the market could use other cash resources – such as Isas, savings or their 25% tax-free cash – in order to keep their underlying pension intact.

“Taking a natural income has also been a good strategy previously, although finding companies paying the dividends needed could be a bit like catching smoke in 2020.

“For those who do take capital withdrawals from their pension, the key is to have a plan in place and review your income strategy regularly, ideally with the help of a regulated adviser, to ensure you aren’t risking running out of money early in retirement.”

Tags: AJ Bell | Covid-19 | Pension Freedoms | Tom Selby