I was taken aback this week when reading an article titled as above. My initial thought was ‘really!’. It soon got me thinking about the importance of advice and advisers in the retirement process. I guess it can be very easy for adviser to assume clients hold a level of knowledge about their pensions which is not always the case.
The article went on to say that hundreds of thousands of investors are unaware they can scale back or stop withdrawals from their pension funds, putting them at risk of drawing their savings too rapidly.
Some 52% of over-55s taking an income in drawdown do not know that they can reduce their withdrawals, and 56% are unaware they can stop them (source YouGov survey conducted for Zurich Assurance). Of this figure only 35% of non advised clients, knew they could alter their incomes. By contrast 77% of advised clients in drawdown are aware that they can change their withdrawals and benefit from the flexibility.
The study of more than 2000 people who have unlocked their savings since the 2015 pension reforms, highlighted a critical gap in awareness. The flexibility to vary income is not just a great feature for people in retirement, it is actually a critical feature for many who adopt drawdown for some or all of their pension income. If shares fall in value quickly, many investors unwittingly risk falling into the ‘pound cost ravaging’ trap where, as stock prices drop, retirees are forced to sell more shares to maintain the same level of income. Depleting their capital more quickly and reducing future growth potential.
Strategies can be put in place to help mitigate the above, such as holding one to two years’ worth of income on deposit. Providing a buffer of funds which will allow you the flexibility to stop selling shares for a period when they are lower in value.
Clients reducing the level of income they take whilst values are lower is also a potential option, but this highlights the importance of guaranteed income streams such as state pension benefits, defined pension benefits and annuities, which all have their place.
Ultimately the article, written by Zurich, was aimed at telling the advice community Look, people need advisers’. Advice is something that I have always championed but seeing the stats surrounding a lack of knowledge, particularly in the unadvised space, only strengthened my opinion. Drawdown pensions are a great tool for many but are not without risk. Not just investment risk but risk surrounding the strategy adopted. As ever, White Oak Financial Planning is here to help. For chartered independent advice, direct from a pension’s specialist, get in touch. 01244 952 090, firstname.lastname@example.org