In the first six months following the introduction of pension freedoms in April 2015, over 43,000 drawdown plans have been sold, according to a report from retirement specialist Retirement Advantage.
But the company estimates that the current market volatility could have wiped 8% off the value of a typical drawdown fund since April 2015.
Retirees enter 'drawdown captivity' as pensions suffer market falls
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In the first six months following the introduction of pension freedoms in April 2015, over 43,000 drawdown plans have been sold, according to a report from retirement specialist Retirement Advantage. But the company estimates that the current market volatility could have wiped 8% off the value of a typical drawdown fund since April 2015. Income drawdown plans aim to give people more flexibility with their pensions. Each time money is moved into drawdown, up to 25% can be taken as a tax-free lump sum. The remainder stays invested and taxable income can be drawn directly from the pension. However, drawdown income is not secure: it could run out, if you take out too much, if you live longer than expected or if your investments do not perform as you had hoped. Wait for markets to recover In the current economic climate, many people could be much better off waiting for markets and pension values to recover before taking an income from their fund, says Retirement Advantage. It points out that a retiree who took out an income drawdown plan at the start of April 2015, for example, would have done so when the FTSE 100 stood at 6961 (7 April 2015). The FTSE 100 closed on 28 January 2016 at 5931 points, down 15%. But most drawdown customers will be in a mixed portfolio of equities, bonds and cash, which could have fared slightly better with a drop of 8% before charges. The report highlights the danger of market falls for someone who has just retired and has to continue drawing an income from their shrinking portfolio. For example, a £100,000 drawdown plan invested in a mixed portfolio of assets (after withdrawing an income of £5,571 which matched the annuity rate available at the time), would now be worth £86,522, or 13.5% less than nine months ago. 'This won't be a great start to your retirement,' says Andrew Tully, pensions technical director at Retirement Advantage. 'Losing around a tenth of your pot in 10 months will leave many people feeling queasy about the future. 'It is easy to say don't panic, but you might well be spooked if you are relying on drawdown to generate an income, as you will probably need to sell units in a falling market.' This, he says, may push people who do not want to crystallise losses but are short of alternatives for paying the bills into a period of 'drawdown captivity'. The old days of using either an annuity or a drawdown plan are over, says Tully. 'If you want to sleep easy at night, then a blend of both products may be best. 'You can secure a guaranteed income to pay the bills, and this allows you to adopt a longer-term strategy for the growth element, giving flexibility to ride out stock market storms.'
Source Moneywise http://ift.tt/20690Qk
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