29 Jul 2019
Many people in income drawdown are unaware they can slow the flow or turn off the taps, with those not receiving advice unsurprisingly most in the dark
Hundreds of thousands of investors are unaware they can scale back or stop withdrawals from their pension funds, putting them at risk of draining 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, despite income flexibility being a defining feature of the arrangement, a YouGov survey for Zurich shows.
The findings are starker for those who do not have a financial adviser: just 35% of non-advised retirees understand that they can reduce their drawdown income, compared to 77% of people who are receiving ongoing advice.
The study of more than 2,000 people who have unlocked their savings since the 2015 pension reforms highlighted a critical gap in consumer awareness, which Zurich estimates could leave half of the 615,000* people in drawdown exposed if stock markets fall.
If shares tumble, many investors unwittingly risk falling into the ‘pound cost ravaging’ trap where, as stock prices drop, retirees are forced to sell more investments to achieve the same level of income, depleting their capital more quickly and reducing its future growth.
Alistair Wilson, head of retail platform strategy at Zurich, says: "Investors are making complex choices in drawdown without fully understanding how it works.
"There is a critical gap in consumer awareness, which could mean many of those without a relationship with a financial adviser face poorer outcomes in retirement."
The income 'brakes'
Investors taking a fixed level of income in drawdown could struggle to sustain their pots throughout retirement.
"Drawdown gives people the flexibility to shift their income up or down as their spending needs change, or markets fluctuate, yet a staggering proportion of people are seemingly in the dark over the control they have," says Alistair.
"If investment returns come to a sudden halt, savers need to be prepared to step on the income brakes. People who are unaware they can slow down or stop their withdrawals could seriously damage their savings and deplete their pots too soon."
Savers can protect their portfolio by holding up to two years' living expenses in cash, which reduces the need to sell investments when the value of investments is falling, giving them a chance to ride out short-term bumps in the stock market.
Alternatively, limiting withdrawals to the natural income from shares or bonds leaves the underlying investment intact, giving it a better chance to regain lost ground when markets recover.
For more wealth content from Zurich, visit https://www.zurichintermediary.co.uk/en-gb/have-you-talked-about
*FCA Retirement Income Data Bulletin September 2018 shows 435,769 people took out drawdown between April 2016 and March 2018. If numbers grew at the same pace as October 2017 to March 2018 (90,504), Zurich estimates the population in drawdown would have increased by 181,008 between April 2018 and March 2019, resulting in 616,700 people in drawdown. See: www.fca.org.uk/publication/data/data-bulletin-issue-14.pdf