Pension savings can be accessed in a multitude of ways and many have feared savers may have prematurely dipped into their retirement funds over the last year or so as the pandemic raged on. HMRC will be releasing official statistics on this tomorrow but data from Hargreaves Lansdown (HL) has provided some insight into what could be expected.
According to HL, the average amount withdrawn via pension drawdown by clients from January to March 2021 was, £2,583, a 43 percent increase on the previous quarter.
Additionally, it was shown the number of pension savers taking income via uncrystallised funds pension lump sums (UFPLS) rose, with a 96 percent jump in Q1 2021, compared to Q4 2020.
Nathan Long, a senior analyst at HL, reflected on these figures and issued important guidance.
He said: “Pension savers felt more confident about dipping into their pension pots at the start of this year, when markets were somewhat calmer than a year earlier.
“While the pandemic sent jitters through the markets, it spooked some retirees, who put the brakes on their pension payments. In the second half of 2020, the average amount withdrawn by HL clients fell to around £1,800. It’s now shot up to £2,583, the highest level for the past two years.
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“Traditionally, savers like to take more out of their pensions in the second quarter, to coincide with the tax year starting. In Q2 2018 and Q2 2019, 37 percent of drawdown clients took a payment from their nest eggs. In Q2 last year, the percentage fell to 33 percent . This was at the height of the market volatility.
“The figure rebounded to 35 percent in January to March this year, as savers felt more confident about lockdown easing and markets looked more stable. It also likely reflects some sensible tax planning before the April 5 tax-year end. I expect we’ll see Q2 this year revert to its normal pattern of high pension withdrawals – unless we see another market wobble.
“For anyone thinking about taking flexible payments from their pension, it’s important to have an emergency fund in place. This should be an easy-access pot of cash, which can be used if you need extra income. For example, if your pension falls in value and you don’t want to crystallise the losses by withdrawing money.
“You should aim for one to three years of expenses in an emergency fund. It may seem a lot, but it’s important to have peace of mind with a decent cash buffer. As we know with the COVID crisis, anything can happen. If the majority of your income is from guaranteed sources, such as the state pension and a final salary scheme, you may feel comfortable just having one year’s worth of expenses squirrelled away. But if most of your income is coming from drawdown, three years would be better.”
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Following on from this commentary, Nathan identified five key questions savers should ask before taking flexible pension payments.
How much do you need to live on and how can you make your pension last throughout retirement?
The first two questions concerned longevity, as Nathan explained: “Have a think about what your likely outgoings will be in retirement.
“Perhaps you will have paid off your mortgage, and have no commuting costs. On the other hand, you may want to budget for extra holidays, or new hobbies to fill your spare time.
“If you’re investing for income, it’s sensible to take the natural yield – which is usually around three to four percent of the pension pot – each year. If you need more, you could start selling the investments. However, this does run the risk that your pension is eroded and you could run out of money, so be careful.”
Where should you invest the money and how should you take account of market movements?
Nathan’s next tips concerned pension investment and while expert advice should always be sought before any decision is made, Nathan laid out a few basic principles which may help with retirement planning: “With the right mix of assets, you should be able to produce a decent level of income, and your pension should be robust enough to withstand any market downturns.
“Once you’ve started taking withdrawals, review your portfolio each year (do you need to rebalance the investments? Is the amount you’re taking out equal to the natural yield?), and don’t forget about annuities.
“Annuity rates improve as you get older – and people often get more risk-averse too – so buying a guaranteed income with an annuity could become more appealing in the future.
“If you’re taking the natural yield from your pension investments, you don’t need to worry too much about dividend fluctuations.
“If dividends take a tumble, history shows that they normally recover fairly quickly. For a short-term top-up in income, you can use your emergency fund.”
How should you take account of market movements?
Pensions are often invested into the stockmarket and as coronavirus emerged, markets across the world saw dramatic movements.
Nathan concluded on this and urged pension investors not to panic or resort to knee-jerk reactions should further drama arise: “When share prices are hit, they can stay low for a long time.
“However, if you’ve already got a well-diversified portfolio you don’t need to do much. Try not to rejig your assets in a crisis – instead dip into your emergency fund, that’s what it is there for.”
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