Retirement savers who took advantage of pension freedoms have had a rollercoaster ride over the past two years.
Investment firm Fidelity International has analysed how pensioners taking £4,000 a year from a £100,000 have fared under different pension freedom strategies.
The data showed that the FTSE peaked when freedoms started in April 2015 and then went into a long, slow decline for almost a year, before regaining lost ground and hitting new peaks in recent weeks.
Analysts explained that the market movement was a risk to investors as more assets had to be sold early on to realise the income needed, which means fewer assets are left in the fund to increase in value when the market rises.
The firm then looked at asset mix to see which fared the best.
Blended portfolios
A traditional 60/40 blend of equities and bonds showed to match a 5.16% average annuity return for a 65 year old of £9,890 over the analysis period, the fund dropped to £89,602 and recovered short of the starting point at £98,852.
At 4%, the fund lost value to £90,194 but recovered to £100,756, but provided income of £8,155.
Diversifying the fund more by adding commercial property delivered the best result.
Matching the annuity income, the fund only slipped to £93,157 and rebounded to £102,242.
At 4%, the fund only dipped to £94,174 and recovered to £104,515.
The other income option was only drawing dividends and interest from the multi-asset fund.
Applying the lessons
The result was an income of £9,012, but the pot only dropped to £93,518 and ended the two years at £103,189.
“The modelling should provide reassurance to pensioners that, in all the scenarios looked at, retirement funds were restored to sustainable levels by the end of two years – a reassuring start for pension freedoms,” said Ed Monk, associate director for personal investing at Fidelity International told The Telegraph.
“The crucial caveat to the exercise is that returns relate only to this period, and will not be repeated. It is still possible to draw lessons, however.
“In line with received wisdom, investing in equities alone produced the best growth and the greatest volatility. If you’re someone who can see through short-term paper losses, this could appeal.
“Others will want to guard against the worst losses, and here a diversified, multi-asset approach appears to work best.”
