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Frighteningly many are!

Pension freedoms arrived in 2015 courtesy of George Osborne allowing pension income to be drawn from a pension pot relatively freely. Many have taken a responsible approach, whilst others may unwittingly run completely out of money as they are not keeping track of their fund values.

History is littered with events that change the course of history and most of us have at least a few memories of events that changed how we live our lives. From the day we met our life partner, to the birth of our first child, they are all game-changers.

Pensions had their own game changer day, in George Osborne’s Budget speech on the 19th March 2014. Without consultation, or even as much as a murmur in the press, the chancellor of the exchequer changed the UK’s retirement income market forever. Osbornes creation is a massive social experiment, nothing more and nothing less.

To provide further insight, one of the UK’s leading pension providers asked a sample of 554 people who have entered into drawdown since April 2015, how they were using their newfound freedoms. Here is what they discovered.

  • Average withdrawals have dropped as the market stabilises.
  • A major concern about the reforms was savers blowing their funds irresponsibly and running out of money in retirement.
  • However, surveys conducted in each of the past three years suggest withdrawals as a percentage of all personal pension pots have dropped steadily as the market settles.
  • Those at the margins who spend the lot without thinking are not all that many.
  • On average withdrawal are under 5% and does not look like a major cause for concern.
  • Advisers have been absolutely critical to this success. Stopping people over spending in the early years.

For those who have taken money out at around the 5% rate and benefitted from the stock market rise since the pension freedoms were introduced, the journey so far has probably been ok. But will it continue?

In addition, the FTSE 100 is anticipating dividend returns of 4.9% in 2019, so investors may be able to withdraw what is called the ‘natural yield’ and still maintain the value of their fund without eroding their capital.

Of course, this will mean that investors will have to take sufficient risk, and the underlying investments deliver the anticipated shareholder dividends. The sustainability of the investment value will depend on various factors, including age, investment risk, and, significantly the importance of the pension pot providing income.

But here’s the problem

Not all is a completely rosy picture. We found that retirees often become ‘complacent’.

Although there are plenty of signs that investors are reviewing and adjusting retirement incomes in response to changing investment conditions, a worrying proportion is just not taking any notice of the underlying investment performance of their portfolio.

3 in 10 respondents of the research admitted they did not know if their investments had suffered any significant falls in value since starting drawdown. These people are effectively relying on ‘chance’ when it comes to retirement income sustainability.

As you would expect me to say, good advice can be worth its weight in gold. A sudden fall in the value of people’s investments – and the possibility of that is always present – could turn a sustainable investment withdrawal strategy into a disaster.

A good adviser can help navigate these complex income issues and ensure you do not accidentally slide towards a retirement disaster.

If you are concerned about the sustainability of your income in retirement, contact us today. We can review your current situation and let you know what options are available to you.

 Click here to book a call with us

This article has been prepared in good faith and based on Midlands Investment Agency’s understanding of the law and interpretation thereof at the time of creation. The contents should not be regarded as specific advice and we always recommend that specific advice is sort from a qualified professional. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.

Martin Dodd author of the Financial Freedom Formula