The risk of ruin
It’s a scary phrase. But when the government reformed pensions in April 2015, it handed over much of the responsibility for our futures to us. So we need to know what could go wrong in this brave new world.
Jon Greer, pension expert at Old Mutual Wealth, runs through the possible pitfalls and traps:
- Running out of money. Splash your cash early on and you may find you’re a pauper in later years. It is now possible, as part of your overall retirement planning, to take some – or all – of your pension fund as cash. You need to have a clear idea of how much you’ll need to spend on essentials and what you have left for discretionary spending.
- Taking too little risk. Keeping your entire pension fund in cash deposits is a way to watch your hard-earned money be slowly eroded by inflation. You may need some exposure to shares – probably via funds – to counter it.
Here’s the proof. Research by JP Morgan Asset Management1 looked at a £100,000 portfolio which had 40% invested in UK large cap equities and 60% in European investment-grade corporate bonds. It returned a nominal £440,000 over the past 20 years. For cash, however, the return was £227,000.
- Volatility. It’s hard to keep a clear head when stock markets are moving wildly either up or down. Trying to second-guess the market and selling at the bottom because you can’t cope with volatility is a common way to lose money.
- Taking out too much money when markets are low. If you are drawing a regular income from your portfolio when prices are falling, it may have to perform twice as hard to make up for the losses.
- Falling for scams. Putting your money with an unregulated or risky outfit in the hope of stellar returns may leave you a great deal poorer.
We’ve illustrated, in an infographic, what you need to look out for to avoid running out of money in retirement.
Jon Greer has sound guidance for income withdrawal. “You can take the view that you are going to be flexible with your spending, he says. Decide you are going to take a fixed percentage of the value of your fund at the time, rather than a fixed amount of cash.”
It works like this:
- Take your state pension and part of your pension fund.
- Use this for essential bills.
- Leave the remainder of your fund in drawdown.
- Adjust the amount you withdraw depending on market conditions.
- You can take more in a good year or decide to spend less when markets have fallen.
“Start by working out your budget and cash flow,” says Yvonne Goodwin, of financial advisers Yvonne Goodwin Wealth Management. “You can’t be clear about what you are going to need in retirement if you don’t know what you will need to spend.
“Look at your regular expenses, get a state pension forecast and find out what date you will receive your state pension. You need to know the figures before you can make a detailed plan.”
As ever, planning and budgeting are essential.
1 JP Morgan Asset Management/Old Mutual combined deck