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Pension savers aren’t being too quick on drawdown

Nathan Long, Senior Analyst - Hargreaves Lansdown:

Only 55% of people entering drawdown have taken income – 45% have simply taken their tax free cash. Of those drawing income, only 40% take it straight away. Of those who put off taking income, 40% wait at least six months and 24% wait at least a year.

‘The swift introduction of pension freedom left many braced for a drawdown shaped catastrophe – taking too much income, too quickly. But our research shows that most people aren’t being too quick on the drawdown. Instead they’re separating the decision to start drawing income from taking tax free cash, which is a very sensible approach.

Those that opt for income are taking their time to settle on the amount of income they draw, and are using the new flexible rules to mould their pension to fit their circumstances as they gradually transition into retirement – only around 1 in 10 people leave work in the year they reach State Pension Age.

The evolution of the market and the regulation that oversees it needs to help consumers get timely, helpful, personalised information so they can make the decisions that are right for them.’

What this means for pension savers

Anyone just taking the lump sum is really still trying to build their pension, but as soon as someone comes to draw income, issues of how much they draw and how long they’ll live become important.

Anyone using drawdown to provide income must understand and be comfortable with the fact their capital and income can fluctuate and they could end up running out of money entirely. They must also be comfortable with reviewing their drawdown plan regularly; we’d suggest following this ten point plan every year.

  1. Review your objective – make sure your plans haven’t changed. Are you aiming to draw no income, draw sustainably for the remainder of your life, or are you trying to deliberately exhaust your pension sooner?
  1. Review the sustainability of your income withdrawals – Check how long your pension will last based on the value, expected returns and how long you might live. Most pension schemes will have a simple way of doing this.
  1. Check how your pension investments are performing – compare performance to the average of similar funds, this should be shown on the fund factsheets. Read up on what investment brokers have to say about the funds you have.
  1. Check relative cost of investments – how much are you paying to invest? Cheapest isn’t necessarily best, but make sure you know what you’re paying for the type of funds you’ve got.
  1. Check investments are still right for your objectives – check the investments you hold are fit for purpose. The types of investments you choose for building your pension are likely to be different to those if you’re drawing an income.
  1. Rebalance your investments – if you’re holding several different investments in retirement they’ll have grown at different rates and so maybe out of kilter. Make sure the balance you want is still what you’ve got.
  1. Get a revised annuity quote – Check what an annuity might pay you, and make sure you plug in all the details of your health. As you get older, you get a better pay out. Plus annuity rates vary with changes in Government bond prices and changes in how long we’re expected to live. An annuity purchase doesn’t need to be all or nothing, you could use just part of your pension.
  1. Review your cash emergency fund – everyone should have at least three-six months’ worth of expenses held as cash, plus an amount to cover any spending from capital in the next five years. If you’re only drawing the income from your investments, add an additional years’ worth of income, but make that two-three years if you’re drawing down more aggressively.
  1. Monitor your pension – this won’t make you immune to poor investment returns, but logging in every three months should avoid any nasty surprises.
  1. Review your beneficiaries – review who you’ve told your pension provider that you’d like to benefit if you die. This isn’t binding, but gives a huge steer for the trustees of the pension. It’s also worth considering adding a power of attorney so someone can look after your affairs if you can’t. This is particularly relevant for drawdown as it can be managed until late in life and one in three of us is expected to develop dementia.

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