A baptism of fire for non-advised drawdown

Teresa HunterEuphoria over the pension freedoms is being tested by a disastrous first year for non-advised drawdown says Teresa Hunter

Around 300,000 policyholders who cashed in their pension after last April and before the markets started to slide may be smugly celebrating their foresight in withdrawing their savings before prices crashed by 20 per cent.

But those who opted into a drawdown contract and a regular income, rather than buying an annuity, may have less to smile about. Along with grim weather, they will have endured the cruel misery that exposure to the market can entail.

As figures from William Burrows Annuities show, a 65-year-old man who used a £100,000 pension pot to purchase an enhanced annuity in February 2015 would have secured a guaranteed monthly income of £542. But if he had gone into drawdown and taken the same amount each month while investing in a cautiously managed tracker fund, his fund value at the end of his first year would be £89,916. In a FTSE UK All-Share tracker fund, he would be down to £83,233.

Advisers, too, may be getting it in the neck for steering clients towards drawdown, rather than an annuity. Indeed, I remember my own financial adviser telling me forcibly that I would not need an annuity when I came to retire as there were “more than enough assets” to provide me with security in old age.

Maybe, but who wants to end up selling absolutely everything to keep the wolf from the door because their pension has dwindled to next to nothing?

As I write this piece, my Sipp is drowning in red. Last April’s euphoria, when the FTSE 100 topped 7,000, seems a distant dream. Since then the index slumped to 5,500, rebounding to top 6,000 again. But 7,000? Not for some time, I suspect. My guess is we will be playing bungee jump for some months.

Indeed, markets could be more volatile yet as the battle over Europe intensifies. Should the ‘outers’ win the referendum, all bets will be off.

In the short term, at least, I have found some reason to smile as my funds seem to be holding up relatively well – with the emphasis on ‘relatively’.

Between the start of the year and 18 February, average UK growth funds lost 10.5 per cent of their value, while average global funds fell by 11 per cent and UK equity trusts by 8.5 per cent. Typically, my funds are down by only 2 to 3 per cent, with a couple looking a bit sorrier than that.

I have no plans to touch these funds for several years. My adviser would tell me, I am sure, to relax and ride out the storm.

Well, yes. But blind faith is not part of my skillset. Rather, experience tells me that markets fall for good reasons. When you look around the world today, it is not hard to spot threats to sound money.

Returns on cash look desperate, with some countries now paying negative interest. If the UK faces a run on the pound during the EU debate, as some commentators suggest, that too could change.

The best advice for those saving for their retirement has to be to exploit to the full this year’s tax breaks, not least because this could be the last opportunity to make the most of full tax relief, given the Chancellor’s review.

Once money is in the wrappers, clients can either hold off investing for a bit or play safe with low-risk options. Boy racers, with decades before retirement, may like to play for higher stakes in the hopes of bigger rewards.

Those in drawdown should be discouraged from taking capital as income; the fastest way to deplete a pot is to keep taking cash when prices dive. Maximum withdrawals should be limited to the natural yield.

Retirees could consider halting withdrawals temporarily, if contracts permit and they have sufficient alternative income.

But given that most people do not have sufficient funds to provide the retirement of their dreams, being canny about how money is accessed will be increasingly important in the future.

That means restricting pension withdrawals to strong markets where possible, and taking funds in the most tax-efficient way – balancing tax-free withdrawals from Isas with pension income, to maximise personal tax allowances. Every penny of tax saved goes straight in the investor’s pocket.