Over the course of history there are certain moments when, for whatever reason, people remember exactly where they were and what they were doing.
These often involve shocking, unexpected events that fundamentally alter the course of history. Think of the assassination of JFK or 9/11.
For the pensions industry, George Osborne’s Budget speech on 19 March 2014 is as close as you will get to a JFK moment. Without consultation, briefing or even as much as a murmur in the press, the then-chancellor tore the UK’s retirement income market asunder.
Back then I was a journalist. I was sat beside a couple of rather pale-looking representatives from a well-known annuity provider we had in for the day to provide a bit of commentary and reaction. This is a family publication so I will not repeat what was said in the immediate aftermath – let’s just say it rhymed with ‘Friar Tuck’.
Almost four years into this massive social experiment, the Financial Conduct Authority (FCA) is only just getting to grips with the market, informed by its own analysis of consumer behaviour.
To provide further insight, AJ Bell asked a representative sample of 554 people who have entered drawdown since April 2015 how they were responding to the freedoms. Here is what we found.
Average withdrawals drop as the market stabilises. One of the major concerns about the reforms was savers splurging their funds irresponsibly and running out of money in retirement.
However, surveys we have conducted in each of the past three years suggest withdrawals as a percentage of all personal pension pots have dropped steadily as the market settles.
While there will be those at the margins who spend the lot without thinking, an average withdrawal of under 5% does not look like a major cause for concern. Advisers have been absolutely critical to this success.
Indeed, for those who have taken money out at around this rate and ridden the stock market wave since the pension freedoms were introduced (at least until the 2018 dip), the journey could well have been plain sailing.
Also with the FTSE 100 expected to provide dividend returns of 4.9% in 2019, investors may be able to apply a ‘natural yield’ strategy and maintain their lifestyle in retirement without eroding their capital.
This will rely on retirees taking sufficient risk, and the underlying companies delivering the anticipated shareholder payouts.
Of course, sustainability depends on a variety of factors including age, risk, and, crucially, the extent to which someone is relying on the pension pot in question.
A thorny mix
All is not rosy in the garden, however. We found the retirement income ‘engagement gap’ remains.
Although there are signs of savers reviewing and adjusting retirement incomes in response to tough investment conditions, a worrying proportion are oblivious to how their underlying fund is performing.
Three in 10 respondents admitted they did not know if they had experienced significant falls in their pension fund value since entering drawdown. These people are effectively relying on blind luck to ensure their retirement income strategy remains sustainable.
This is another example where good advice can be worth its weight in retirement gold. A sudden dip in the fortunes of these people’s investments – and there is no shortage of potential economic shocks right now – could turn a sustainable-looking withdrawal strategy into a patently unsustainable one.
A well-informed adviser can help navigate these complex waters and ensure clients do not drift towards retirement disaster.
Tom Selby is senior analyst at AJ Bell