Pension Freedom reforms introduced back in 2015 have given you greater choice over how you access your retirement fund.
Options such as Flexi-Access Drawdown allow for enormous flexibility but also place the emphasis on you to manage your own income. It is up to you to ensure your pension pot lasts for the rest of your life.
Managing your own pension income means taking sustainable withdrawals while keeping track of the amount that remains invested.
Recent stock market fluctuations make the job of managing withdrawals more difficult.
So how should you manage your pension pot in retirement? And what can market volatility mean for the level of income you receive?
Flexi-Access Drawdown in brief
Drawdown has been around for a couple of decades, but Flexi-Access Drawdown, introduced in 2015, gives you added control over the retirement income you receive.
Whereas a standard Annuity is regular and stable, but rigid, Flexi-Access Drawdown is ‘flexible’. You decide the amount you receive, and when, meaning you draw a pension income only when you need it.
You can take tax-free cash from your pension pot – up to a maximum entitlement of 25% – and the rest remains invested.
The focus is on you to budget efficiently, ensuring you withdraw a sustainable amount.
You’ll need to consider several factors.
How to budget with flexible withdrawals
A general rule of thumb once stated that a 4% drawdown rate would provide you with sufficient income to last for the rest of your life. More recently, this traditional wisdom has come under fire.
The 4% ‘rule’ was devised in the US in the 1990s, at a time when interest rates were high. In 2017, just two years after Pension Freedoms, FTAdviser (quoting an Aegon report) concluded that one in five pensioners following the 4% guide would run out of money within thirty years.
Rather than using a generalised rule of thumb, tailor your withdrawals to align with your own long-term financial goals. We can help, providing individual advice based on your aspirations for retirement.
We consider many different factors:
- Your age – You’ll likely be more active when you first take retirement. You might have travel plans or be looking to provide financial support to loved ones. Your discretionary expenditure during these years might be higher.
- Your life expectancy – As life expectancies rise, retirement income needs to last that bit longer. Maintaining your desired standard of living while leaving enough to cover the unexpected can be tricky.
- Any other income you have – Your pension is unlikely to be your only source of retirement income. As well as the State Pension, you might have investments or money from Buy to Let properties. We can help you see your pension pot in the context of your wider financial position.
- Potential costs in later life – Your early years of retirement might be the most active, your later years could carry additional expenses too. We will factor in the unexpected, such as later life care costs.
The key is to take enough without taking too much. That isn’t always easy, but we can help.
Integrated into a wider financial plan, drawdown can give you enormous flexibility.
You might use your pension to cover fixed expenses. Equally, if fixed expenses are covered elsewhere, your drawdown pot could be used for discretionary expenditure, such as holidays.
Each time you withdraw an amount, check how much you have left and budget accordingly.
This balancing act can be trickier during periods of market volatility.
Flexi-Access Drawdown in a volatile market
When you take a flexible withdrawal from your pension pot, the remainder stays invested. It is subject to fluctuations in the stock market, which means your investment amount can go down as well as up.
The first half of 2020 saw massive market volatility caused by the coronavirus pandemic.
A decade-long bear run ended in the US, and here, the FTSE 100 suffered its largest quarterly fall for more than 30 years, dropping by 25% in the first three months of the year.
But what does this mean for your withdrawals?
Simply put, when markets are low, you’ll need to sell more invested units to receive the same level of income.
Your unit holding will diminish quicker than you might expect during these periods, and certainly faster than if the markets were high.
Consider limiting your withdrawals during times when the market is low, or not taking income at all. If you can’t afford to hold off, consider taking only what you need in the short term.
When the markets are volatile it becomes more important than ever that you keep track of your residual pot and manage it sustainably.
Get in touch
If you are worried about the effect of short-term market volatility on your Flexi-Access Drawdown withdrawals, please get in touch. Email at email@example.com or call 0800 0787 182.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation which are subject to change in the future.