The recent stock market falls will be particularly worrying for those living from investments in retirement and relying on their pension pot for an income.
Retirees may have seen the value of their pot fall which can feed through to a lower regular income. There are steps, however, that can be taken to ensure your pot remains sustainable and has the best chance of recovery in the future.
There are a number of ways that you can generate an income from a pension that remains invested. Those in ‘Drawdown’ are able to take a level of income which they set at the outset and can adjust over time, or they can take lump sums as and when they choose.
Getting that level of income right and reacting to adapt your plans in response to market changes is key to ensuring your pot remains in good shape.
Here’s what you need to know.
The risk when markets fall
The aim of investing in retirement is to generate an income which is sustainable in the long run. When measured over the full length of a typical retirement, growth in stock and bond markets has been sufficient to provide an income which is greater than simply relying on cash savings interest.
In an ideal world, the income generated from share dividends and bond interest will provide a healthy income with the option of running down capital as well as time goes on and you have greater certainty about how long your money needs to last.
The problem is that the ride can be bumpy, with periods like right now in which stocks lose value. If the level of income you take from investments exceeds the dividend and bond interest being generated, you have to sell assets. In a rising market that might be OK but when prices are falling you need to sell more assets - or ‘capital’ - to get the same income.
This shrinks your pot more quickly and can make it unsustainable - it should be avoided if possible. The aim should be to give your invested pension money time to recover.
Adapting your income
To avoid reducing your capital too quickly, consider reducing the level of income you take so that it does not exceed the amounts being created naturally by investments. Retirees with financial advisers are often advised to use multi-asset funds in Drawdown which spread your money across different types of assets and are designed to pay a natural income in this way.
But even those who invest by choosing their own funds can elect income versions so that dividends and interest are paid out without selling assets.
If you can afford to do it, it can even be advisable to turn off income from investments entirely so that any income generated is ploughed back into investments. If you do this, the recent market falls can work in your favour because you will be buying assets at cheaper prices.
Make use of your cash savings
Sensible retirement planning requires you to keep a store of cash on hand that is separate to your invested pension. Financial advisers often recommend keeping between six to 12 month’s worth of income on hand in cash to be used during periods when income from investments is reduced.
If you have other sources of guaranteed income - like a final salary pension or annuity - these can be combined with withdrawals from cash to make up your income while your invested money has the chance to recover.
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Important information: The value of investments can go down as well as up, so you may not get back the amount you originally invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not normally be possible until you reach age 55. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.