Pensioners investing in drawdown have got lots of income and growth, but with more risk (Image: Getty)
The reforms, introduced in 2015, put millions in charge of their pension pots. Instead of being forced to buy a restrictive lifetime annuity at retirement, they were freed to leave their savings invested in the stock market.
Those who took the opportunity have almost doubled their money over the last decade as share prices rose.
Even better, they’ve drawn down huge sums of income at the same time. It’s been win-win, although not without risk.
New research from fund manager Fidelity highlights the success of pension freedoms. It looked at a pensioner who had £100,000 in their pot when the reforms were introduced in April 2015.
Fidelity assumed they left their money to grow in a balanced portfolio of global shares while following the long-standing ‘4% rule’.
Financial advisers have been recommending this for decades. It’s called the ‘safe withdrawal rate’ and says if you take 4% of a pension annually you shouldn’t erode your capital.
In fact, it should grow. That’s what Fidelity figures show.
Under this tip, the £100,000 pot would have growth to an impressive £189,000 today. That’s despite withdrawing a staggering £47,779 in total income.
So the total return is a staggering £236,799! Pensioners in drawdown have more than doubled their money.
It’s a brilliant example of how investing in the stock market can generate both income and growth over the longer term. It works for smaller pots too.
Even those who withdrew more than 4% a year saw their capital grow. If they had taken 7% income annually, they would have withdrawn £83,648 in total. Yet their pot would still be worth £131,474 today.
Don’t miss…
Fidelity’s associate director Ed Monk said: “What jumps out immediately is just how well the class of 2015 have done. Even at the higher withdrawal levels of 5%, 6% or 7%, pots remained relatively healthy.”
Pension freedoms have been hugely popular, with 2.6 million retirees accessing their money flexibly by the 2023/24 tax year, Fidelity says.
However, they’re not without risk. Drawdown leaves pensioners exposed to stock market fluctuations, and there’s always the danger of depleting a pot, unlike annuities, which guarantee lifetime income.
Drawdown investors will have endured periods of volatility. Monk noted: “Even those withdrawing 4% saw their pot fall below £82,000 in the first year, making it seem unlikely it would last another 30 years.”
Markets also crashed during the pandemic in 2020, but recovered strongly. They are falling again today, as wreaks havoc.
Future pensioners may not be as lucky.
Today’s stock market dip will shrink drawdown pots, although history suggests markets recover from bouts of volatility given time.
Don’t miss… [REVEAL]
To mitigate risks, Monk advised keeping a cash reserve for two to three years of income to avoid selling investments during downturns.
Ironically, figures highlighting the success of pension freedoms come just as annuities are making a comeback, with rates hitting a 15-year high.
A 65-year-old shopping around for an annuity with £100,000 today could secure a level guaranteed income of £7,530 a year, said Stephen Lowe, group communications director at Just Group. “This rises to £8,350 if they bought the same annuity at age 70.”
Lowe noted that today’s higher annuity rates will appeal to pensioners who want a guaranteed income for life. “A mix-and-match approach combining drawdown and annuities can work well, offering stock market growth alongside more security.”
With huge sums at stake, pensioners need to get this right.
They can get free guidance from the government-backed service Pension Wise. Otherwise consider speaking to an independent financial adviser.