If you don’t need to access your invested money for a long time, it’s easy to be relaxed about big swings in markets.
Volatility is the price that investors pay for the chance of a higher return, and those who continue to contribute to invested savings can even take advantage when markets fall.
But when you’re counting on your investments for income - particularly if you are in retirement and need that income to meet living costs - it can be a worrying time.
Those using pension drawdown to provide a retirement income invest their pension savings with the aim of generating an income - normally through share dividends and the interest from bonds. They also seek enough capital growth that their pot will last as long as it needs to. With rising life expectancy, that could be as long as 40 years.
It’s a tricky balancing act. Ideally, dividends and interest from these investments will easily cover the income needed so there’s never any need to sell down assets. The problem is that they may not. And even if they do, you may not wish to maintain the capital value of your pension pot.
After all, a pension is there to fund retirement and leaving a large sum intact until very old age, or even until death, will mean income in the early years of retirement is lower than it could be - precisely at the time when you are likely to be healthier, more active and wanting to enjoy your new retirement.
Getting this right would be so much easier if you could reliably predict market returns because you could set an income level that maximises the potential of your pot for as long as you might need it - but no one has yet been able to do that.
What can you do, then, to handle volatile investments in retirement?
Volatility: the drawdown challenge
To get an idea of how volatility can affect drawdown pension pots, I looked at returns in the period since last summer, which has been particularly rocky for markets. The Fidelity Multi Asset Income & Growth Fund - part of our PathFinder range - is one of the options that advisers from the Fidelity Retirement Service recommend to those entering pension drawdown.
The fund has paid a healthy 4% income yield in the past 12 months, but underneath that the value of the fund has moved about. In fact, between a recent peak on August 11 last year and a low on December 15 the fund fell by 5.6%. It has recovered since, but tor those in retirement a fall like that in just four months will have been a concern.
Give yourself a buffer
Riding out ups and downs like this is much easier if you can avoid having to sell assets when their price is low. In the example above, if the 4% yield the fund paid was insufficient to cover your needs, it may have been necessary to sells assets when they had just fallen by more than 5%, locking in the loss and meaning the pot was permanently diminished for the future. To help avoid that, you can hold an amount of savings in cash which can make up the shortfall in your income so that you don’t need to sell assets.
In fact, in our example, a drawdown customer who avoided selling assets in December to supplement their income will have then seen the value of their fund recover almost all those losses by the 23 February. They could then think about replenishing the cash pot they just used to tide them over.
Secure guaranteed income
The nature of investing means that returns and income are uncertain. Yet your essential spending needs in retirement will be far more fixed.
If you could let your pension drawdown income to rise and fall - taking more when markets have performed well but making do with less when they lag - it makes volatility easier to manage and is very likely to improve the value you get from your pension pot in the long term.
But, of course, you still need money to live on.
Having guaranteed income outside of pension drawdown helps overcome this. It could be from the State Pension or from a Defined Benefit pension, or perhaps from an asset like buy-to-let property. For those not lucky enough to have access to these, it is still possible to secure a guaranteed income by purchasing an annuity. This takes your pension savings and turns it into an income for life.
By annuitising some of your pot, it may be possible to give yourself a baseline of income to meet essential spending, allowing your pension drawdown income to fluctuate.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Some people can benefit from paying for a professional adviser who can recommend drawdown income levels that maximise your pension pot. They can also examine annuities to increase your guaranteed income.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
Five year performance
As at 6 Mar
|Fidelity Multi Asset Income & Growth Fund||9.2||-0.4||16.6||0.3||3.8|
Past performance is not a reliable indicator of future returns
Source: F.E, as at 6.3.19, in local currency terms with income reinvested
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Withdrawals from a pension product will not be possible until you reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. 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.