Maximising retirement income

By 16th August 2018Louise's Column

Time to start looking at accessing your pension?

Income drawdown is a way of using your pension pot to provide you with a regular retirement income by reinvesting it in funds specifically designed and managed for this purpose. The income you receive will vary depending on the fund’s performance.

However, worryingly a third of people using income drawdown (32%) to fund their retirement have no investment experience, yet two in five (41%) of these have not received either financial advice or guidance, according to new research[1].

Taking advantage of new pension freedoms
Almost half a million (431,581)[2] people are taking advantage of new pension freedoms to draw down their retirement savings, yet the highest proportion have never actively invested in the stock market. Despite being first-time investors, tens of thousands have not sought regulated financial advice or guidance, even though they have an average drawdown pot of £153,000.

You can normally choose to withdraw up to 25% of your pension pot as a tax-free lump sum. The rest is moved into one or more funds that allow you to take an income at times to suit you.

Some people use it to take a regular income. The income you receive might be adjusted periodically depending on the performance of your investments.

Flexi-access drawdown – introduced from April 2015, where there is no limit on how much income you can choose to take from your drawdown funds.
Capped drawdown – only available before 6 April 2015 and has limits on the income you can take out; if you are already in capped drawdown, there are new rules about tax relief on future pension savings if you exceed your income cap.

Lack of professional financial advice
The study warns that a lack of professional financial advice and guidance could leave retirees at risk of running out of money in retirement. Poor decisions in drawdown can lead to consumers taking on too much risk, missing investment growth or making unsustainably high withdrawals. Women in particular were more likely to be first-time investors, potentially putting them at greater financial risk (41% vs 29%).

Findings highlight a ‘first-time investor gap’ is being driven by a lack of consumer understanding of drawdown, with almost half of novice investors who had not received advice saying they thought drawdown would be simple (47%). A further third (29%) claimed they were confident in their investment decisions, despite having no previous experience of actively investing.

Navigating the complexities of drawdown
The research also reveals that one in ten (10%) UK adults not getting advice rely on search engines to help them navigate the complexities of drawdown, while one in five (20%) look at newspapers and magazines. Pension firms were the leading source of guidance for a third (35%) of consumers. Worryingly, though, 44% of all those in drawdown confessed there is nothing that would prompt them to get professional financial advice or guidance.

Some drawdown providers might offer retirement income products that combine income drawdown with other features that might offer guarantees about income and/or growth.
Income drawdown products are complex. Remember that you don’t have to take income drawdown from your current pension provider. You should shop around. τ

Source data:
[1] Study carried out for Zurich UK
based on a YouGov survey of a UK sample of 742 people who have moved into drawdown since the pension freedoms were introduced in April 2015.  The survey was carried out between 14 December 2017 and 24 January 2018.
[2] FCA Data Bulletin (issue 12) shows 345,265 pots moved into income drawdown between October 2015 and October 2017. Assuming the number of people moving into drawdown continued at a similar rate from November 2017 to April 2018, this would equate to a further 86,316 people in drawdown. 345,265 + 86,316 = 431,581

PENSIONS ARE A LONG-TERM INVESTMENT.

THE RETIREMENT BENEFITS YOU RECEIVE FROM YOUR PENSION PLAN WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE VALUE OF YOUR PLAN WHEN YOU DECIDE TO TAKE YOUR BENEFITS, WHICH ISN’T GUARANTEED, AND CAN GO DOWN AS WELL AS UP.

THE VALUE OF YOUR PLAN COULD FALL BELOW THE AMOUNT(S) PAID IN.