The importance of taking stock of your pension withdrawals after market volatility

2020 saw a lot of volatility within investment markets. While vaccine news means there is hope for battling Covid-19 in 2021, there’s still a lot of uncertainty. If you’re retired and are taking a flexible income from your pension, it’s likely your pension is invested, so it’s important to take stock of how it has been affected.

If you chose to access your pension flexibly using a Flexi-Access Drawdown scheme, your pension savings will typically remain invested throughout retirement. This gives your pension an opportunity to deliver returns, but also means you remain exposed to investment risk. As your funds are not guaranteed, it is of the utmost importance that you ensure your pension will provide an income for the rest of your life. This will include a review of your current withdrawals and how this is impacting your pension pot.

2020: Covid-19 volatility

Investment markets often experience short-term volatility, but 2020 saw more than most. In fact, markets experienced some of the sharpest declines they’ve seen in decades.

As the Covid-19 virus spread and was declared a pandemic, the markets reacted to the news and the to the steps governments took to slow it. This led to sharp dips in March, followed by ups and downs throughout the rest of the year. As your pension is invested, the value of your savings will have been affected. The extent however, will depend on your portfolio.

A well-diversified portfolio will hold assets across a variety of industries and geographical locations. This means your investments are unlikely to have suffered dips as sharp as those stated in the headlines. While some sectors have been badly affected, others have seen a small impact and some have even benefited.

The FTSE 100, for example, suffered its worst year since the 2008 financial crisis, with the index falling 14.3% during 2020, according to the Guardian. But this was the worst performance among the largest international stock indexes. By the end of 2020, the World stock markets bounced back rising up by 13%.

Why investment performance is important when taking a flexible income

If you’re investing with a long-term goal in mind, short-term volatility generally has little impact on your overall strategy and goals. However, this changes if you’re taking a regular income from the investments. This is because you could be withdrawing funds when the market is low.

When you make a withdrawal while the market are low, you need to sell more units to achieve the same income. This can mean your investments are depleted quicker than expected. You also have less in your pension to benefit from any rises that may follow, which can mean returns fall short of expectations too.

Therefore, regular reviews when you’re using a Flexi-Access Drawdown scheme are important to ensure your retirement income remains on track.

5 things to do when reviewing your pension

If you take a flexible income, don’t panic. If you worked with a financial planner, volatility will have been considered when setting out a plan and there are often steps you can take to bridge gaps to ensure your long-term finances remain secure.

Here are five things to do to review the impact of volatility in your pension:

1. Review pension values: The first step to take is to see what the value of your pension is now. This will give you an idea of how volatility and withdrawals have affected investments.
2. Look at your lifestyle plans: The value alone isn’t enough to understand if volatility has affected your retirement plans. You also need to consider your lifestyle, how long your pension needs to last for, and the income required.
3. Consider investment growth: Remember, your pension savings remain invested, so over the long-term should benefit from investment growth. This can help your savings keep pace with inflation and provide you with security throughout retirement.
4. Calculate if there will be a gap: With an understanding of how your pension will grow and the income needed for your lifestyle, you’re in a position to see if volatility has left you with a gap and where additional steps may need to be taken. We understand this can be difficult to do, which is why working with a financial planner can offer you peace of mind.
5. Book a meeting with a financial planner: Pulling together the different pieces of information to see if the market volatility will have an impact on your plans can be difficult and time-consuming. We’re here to help you with the process and give you peace of mind that your retirement income is secure. If adjustments do need to be made, we can work with you to provide a solution that matches your aspirations.

One of the steps you can take to protect against future volatility is to reduce or pause pension withdrawals during these periods. Ideally, you should have three to six months of expenses in a cash account that you can draw upon in these circumstances. This can help protect your long-term income.

Please get in touch if you’d like to review your pension and wider financial plan.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.