Retired investors are being warned that taking capital out of their pensions during falling markets could cause irreparable damage to their financial security.
Black Monday highlights risks for retired investors
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Retired investors are being warned that taking capital out of their pensions during falling markets could cause irreparable damage to their financial security. On Monday 24 August the FTSE 100 lost close to 5% as concerns over China's struggling economy led to one of the biggest global stockmarket sell-offs since Lehman Brothers collapsed in 2008. Experts reckon global markets lost a total of $1.6 trillion on that day. Danny Cox, head of financial planning at Hargreaves Lansdown, said: "Falling markets can have a significant impact on those drawing capital from their pension plans at retirement. If you draw capital when markets fall, you run an increased risk of rapidly eroding your pension and running out of money. You are locking in losses and can suffer irreparable damage." Navigate choppy markets However, Cox said it was important to appreciate the difference between drawing capital and investment income out of a pension. The former involves selling assets to fund the withdrawal while the latter only takes the gains made by your assets and your underlying capital remains intact. Advisers call this taking the 'natural yield' of your investment. He added: "Investors who stick to a strategy of taking the natural yield, or even no income at all, can better navigate choppy markets." Although market volatility can give retirees sleepless nights, Cox said there are plenty of steps savvy investors can take to protect their funds. In addition to limiting withdrawals, Cox said investors should also keep a sizeable chunk of their pension in cash. "Keep at least one year's income – preferably two –in your pension plan, which will serve as a useful buffer during extreme markets. Drawing cash is unaffected by market movements and this account can be topped up by income generated from investments – such as dividends from shares or yields from bonds." Ensuring you have a high level of diversification in your portfolio is also important. Cox said: "A diverse and balanced portfolio which has a mixture of different investment assets – cash, fixed interest and shares – is likely to be better protected during market falls and provide more consistent performance." Finally, if you have savings you can take advantage of tax relief on contributions and pay more money into your pension. This means an injection of £2,880 will be boosted by £720 tax relief, giving you a total contribution of £3,600 for a non-earner. Cox explained: "Add this into your pension pot when markets are lower and this will help the drawdown plan make up lost ground as markets pick up. If you have earnings, you can pay in more but remember those who are drawing income flexibly via drawdown effectively have their contributions to Sipps and other money purchase pensions capped at £10,000."
Source Moneywise http://ift.tt/1PSIaaR
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