How to manage drawdown pensions during market volatility
By Cristian Angeloni, 3 Apr 20
Quilter gives five tips on how to limit coronavirus-induced damage for retirees
If income is a problem, however, retirees may want to consider other streams besides their pension pots.
Greer continued: “When you are in drawdown the sequence of your investment returns is of vital importance.
“In the scenario below, which shows a retiree with a portfolio of £100,000, taking annual withdrawals of £5,000, their portfolio could be 22% worse off if they experienced losses in the first two years of retirement, compared to having these same losses in years four and five.”
Returns of a £100,000 portfolio over five years
|
Portfolio 1 |
Portfolio 2 |
||||
|
Year |
Withdrawal |
Annual returns |
Annual portfolio value (£) |
Annual returns |
Annual portfolio value (£) |
|
1 |
£5,000 |
25% |
£120,000 |
-25% |
£70,000 |
|
2 |
£5,000 |
15% |
£133,000 |
-15% |
£54,500 |
|
3 |
£5,000 |
0% |
£128,000 |
0% |
£49,500 |
|
4 |
£5,000 |
-15% |
£103,800 |
15% |
£51,925 |
|
5 |
£5,000 |
-25% |
£72,850 |
25% |
£59,906 |
|
22% difference |
|||||
Greer added: “This is due to a process known as ‘pound-cost ravaging’, where because of declining markets, more investment units have to be sold to generate a desired income level, thus depleting the portfolio size during the early years of drawdown.
“One way to avoid this and allow your pot to recover is to take your income from the dividends and bond payments that your underlying investments will provide.
“While dividends and bond yields can fluctuate, this approach avoids the requirement to lock-in a fall in the market by selling units in order to generate an income.”
But many companies have suspended or scrapped paying their dividends altogether, and investors in drawdown will need to diversify their income.
“It is important investors mitigate some of this risk by having a diverse income stream, such as infrastructure investments, and do not rely solely on a few large dividend–paying UK businesses,” Greer said.
“Another option is to utilise other assets in the medium term while markets recover, particularly something like a cash Isa.
“This might provide a form of compromise which allows individuals to pause or reduce their pension income withdrawals, thereby avoiding the need to compound losses in their pension.
“If you have cash savings or other assets you can afford to live off, which haven’t been affected by the stock market fall, then this might be the best option.”
Tags: Covid-19 | Drawdown | Pension | Quilter | Volatility
