Stock market turmoil is sucking the value out of pension funds and putting retirement savers in flexible drawdown in financial trouble.
Tens of thousands of pension savers have drawn cash from their pensions since flexible access was introduced in April 2015.
But the flux in global stock markets has revealed a flaw in flexible access.
Timing when to take pension cash is crucial because quick changes in markets can add or take away value almost in a blink of an eye.
Financial firm William Burrows Annuities gives an example.
How market slump hits pensions
A man aged 65 who bought an enhanced annuity in February 2015 with a £100,000 pension fund receives a guaranteed monthly income of £542 for life.
If the same saver took that £100,000 fund and invested the cash in a FTSE UK All-Share tracker fund, the pot would have shrunk by £16,000 to £83,233.
For an investor this means the pension fund is likely to run out quicker because even if the markets rise, instead of returns on a £100,000 fund replenishing the pot, the fund is significantly smaller and the investor is playing catch up.
Around 120,000 retirement savers have started drawing down their pension under flexible access in the past 12 months.
Although those with funds valued at £30,000 or more have to take financial advice before taking the cash, anyone with a smaller fund can take as much as they like and spend the money as they want.
Control over savings
“The aim of pension drawdown was to give more people control over their pensions,” said Mark Stopard, of financial firm Partnership.
“However, drawdown is a balancing act and if the fund is hit by a falling market at the start, it’s difficult to get back to the same financial position as another product, such as an annuity might provide.
“Trying to get back on track by taking the cash out of equities and putting it in an annuity will reveal a loss of purchasing power and a much lower return than if the fund was used to buy an annuity from day one.”
To balance the comment, if stock markets perform well over the life of the annuity, the reverse argument could be that putting the cash into equities may have proved a better investment.
The question for investors is will the guaranteed rate from an annuity outpace the returns from investing in equities in the long run?
