People aged 55 or over have moved swiftly to take advantage of pension freedoms – within only four months the new regime has seen Britons withdraw more than £1.8billion from their pensions. Now, in the wake of the startling Chinese stock market crash, retirees are being cautioned to hold fire and delay any plans to cash in all or part of their pension pots.
While the inherent flexibility of the new freedoms is incredibly appealing, a pension takes many years of discipline and commitment to build and does not deserve to be put at risk. It is critical for retirees to stall all decisions relating to moving any pension money, certainly until the markets have stabilised. The FTSE initially rebounded from Black Monday on 23 August, but has since seen further volatility with markets falling once again, illustrating that we have not seen the end of the turbulence. Therefore, prudence should prevail and the best advice to retirees is to wait until the market has stabilised. This may take some time. British pension funds are largely invested in London’s FTSE 100 which, on Black Monday, lost more than £70billion and has fallen by more than 10 per cent in the last two weeks. This has slashed the value of pension funds and is creating havoc within the at-retirement community. People are seeing their plans for retirement unravel and this is a terrible blow for them.
Over-55s who can manage without accessing their pension funds should do everything possible to continue as they are and leave their funds in tact to avoid locking in the losses. General expectation is that losses will be recouped in the longer term.
The same principle applies to retirees who are using income drawdown schemes to withdraw a regular income from their pension funds while keeping the remainder invested. These individuals must try to protect the capital in their fund from being eroded and should try to only withdraw the amount they are making in income from dividends. Taking a lump sum from the pension pot while the stock market is low effectively means biting into a higher proportion of the overall fund which may leave it dangerously depleted.
Funds being used for income drawdown, should be correctly structured, to allow for market fluctuations. One way to do this would be to keep an appropriate proportion of the investments in cash deposits and fixed interest to sustain income payments during volatile market movements.
Retirees can use the new freedoms to withdraw the minimum they need, rather than crystallising a large loss on the entire fund.