Pensioner drawdown double whammy – incomes smashed as inflation soars and shares CRASH

Martin Lewis compares pension annuity against drawdown

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Millions of pensioners now leave their retirement nest egg invested via income drawdown, and take income and lump sums as required to cover their spending. Yet as inflation hits a 30-year high of 5.5 percent, they are being forced to draw ever larger sums and risk running out of cash altogether.

Now they face a second threat as global markets may go into meltdown if Russia invades Ukraine. A stock market crash could destroy the value of their savings held in drawdown, just when pensioners need them more than ever.

Income drawdown has become hugely popular since 2015’s pension freedom reforms scrapped the obligation to buy an annuity at retirement, but it also carries major risks, warns Nigel Hatt, head of pensions at financial advisers Tilney Group.

Done properly, pensioners should aim to draw income equal to the amount of annual growth on their pension fund, Hatt says. If they do that, their money should never run down.

But he warned: “While this is the desired result, it isn’t always the reality. The value of your pension may fall as well as rise, and you could end up with less than you originally invested.”

As the cost of living rages out of control, many pensioners are being forced to dip into their pension again and again, as they scramble to pay rocketing food and fuel bills.

Last week we saw the damage a crash would cause, as the FTSE 100 lost £54 billion on Monday on fears that Vladimir Putin was about to invade Ukraine. If Russian tanks and troops do roll in, drawdown savers will face a double squeeze.

People could see the size of their pension pot collapse, at the same time as they are drawing more money than ever from it.

Combined, this could spell disaster.

Worryingly, too many pensioners were already withdrawing money from their savings at an unsustainable rate BEFORE inflation struck, according to Financial Conduct Authority figures.

Financial planners say retirees can take four percent of their pension pot each year without running out of money. This is known as the “safe withdrawal rate”.

Yet official figures show that almost half drew more than eight per cent of their pension last year.

That’s DOUBLE the safe withdrawal rate.

Withdrawals on that scale would reduce a £100,000 pension pot to just £20,000 after 10 years, leaving little for later life.

Even if investment growth averaged three percent a year, regular annual withdrawals of eight percent would reduce it to £40,254.

Too many pensioners are now entering the danger zone, warns Helen Morrissey, senior pensions analyst at Hargreaves Lansdown. “Taking large withdrawals early on means you could run out later.”

Since drawdown took off in 2015, stock markets have been relatively buoyant, helped by Government low interest rates and government stimulus during the pandemic.

As inflation rises and Russia menaces Ukraine, they could now crash amid growing fears of a share price superbubble.

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This would be frightening new territory for drawdown savers, says Stephen Lowe, retirement expert at Just Group.

“The worst-case scenario is that you are forced to draw extra money from your pension AFTER its value has plunged in a stock market crash.”

Markets often recover quickly but that’s no consolation if you were forced to withdraw money at the bottom of the market to pay the bills. “Your pension may never recover from this double blow,” Lowe says.

Nigel Hatt says drawdown is extremely flexible but not without its risks. “The amount of income you will receive is not guaranteed because it is wholly dependent on investment performance, so it will only work for people who have enough guaranteed income from other savings and investments to meet their basic needs.”

As a general rule, it works best for people with a large pension pot and a reasonably high tolerance for investment. “Seeking professional advice is essential and in some cases, a legal requirement,” Hatt says.

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