Drawdown investors profit in first four years of pension freedoms

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  • Analysis of stock market returns since the pension freedoms shows broadly positive outcomes, despite big swings in the values of certain asset classes.
  • An individual with a £400,000 pension pot taking a £20,000 annual income from day one of the pension freedoms will have seen their pension pot grow by £62,000 after four years if invested in the ABI Global Equities sector, despite the impact of £80,000 of income payments.
  • The same retiree invested in the UK Equity Income, Mixed Investment 20%-60% Shares sector averages and Global Fixed Interest, would have seen some erosion in capital, though such erosion was in all three cases less than the total income taken.
  • Investors however do need the stomach to handle volatility. The value of their investments fluctuated by as much as £158,000 if invested in the Global Equities sector average.

Analysis of stock market returns by Aegon, since the introduction of the pension freedoms, shows just how important it is for drawdown investors to be comfortable with stock market volatility.

The analysis* is based on an individual with a £400,000 pension pot taking an annual income of £20,000 a year from 7 April 2015. They would have seen the value of their savings swing between £330,000 at their lowest point and £488,000 at their highest if invested in the ABI Global Equities sector average – a difference of £158,000.

While the swings in value were less dramatic for other asset classes, they are still significant, with those investing in the ABI UK Equity Income sector average experiencing a swing in value between the highest and lowest point of £88,000 while those in the ABI Global Fixed Interest sector average will have experienced a swing of £72,000. Those who opted for a ‘cautious’ mix of equities and bonds, by investing in the ABI Mixed Investment 20%-60% Shares sector average will have seen smaller fluctuations of £50,000 over the period.

 

ABI Mixed Investment 20%-60% Shares

ABI Global Equities

ABI Global Fixed Interest

ABI UK Equity Income

Highest point

£405,000

[April 15]

£488,000

[August 18]

£434,000

[October 16]

£427,000

[May 18]

Lowest point

£355,000

[February 16]

£330,000

[February 16]

£362,000

[November 18]

£339,000

[February 16]

Difference

£50,000

£158,000

£72,000

£88,000

Value at 7 April 2019

£369,000

£462,000

£367,000

£390,000

Income taken

£80,000

£80,000

£80,000

£80,000

Figures rounded to the nearest £1,000

Investment volatility.jpg

Four years on from the anniversary of the pension freedoms, those invested in Global Equities will have seen the value of the pension actually grow beyond its original starting value, a particularly strong result given the £20,000 annual income being taken. The original £400,000 had become £462,000 as of April 2019. Those in UK Equity Income (-£10,000), the ‘cautious’ investment mix (-£31,000), or Global Fixed Interest (-£33,000) all saw the value of their savings decrease. However, in all cases those decreases were significantly less than the £80,000 total income taken.

Nick Dixon, Investment Director at Aegon commented:

“The pension freedoms have been embraced by retirees and come with a great many benefits, not least of which is the potential for savings to continue to experience investment growth into retirement. Their flexibility does however introduce new considerations for savers and, as our figures show, those who opt for drawdown need to be comfortable with the idea that the value of their pension will rise and fall over time. Markets have generally performed well since the introduction of the freedoms, but even so, some of the swings in value have been quite significant.

“People who opt for drawdown need to be comfortable that the investments they’re holding match their risk appetite and should reassess the investments they hold and the level of income they take from their savings at regular intervals. These decisions can be complex and it can be beneficial to seek professional financial advice. Doing so is likely to provide extra confidence in the event that the value of your investments does fall as you’ll know that they have been selected as part of a long-term plan tailored to your goals.”

Notes to Editors

*Analysis based on Morningstar Direct data, produced by Aegon. Figures in £s, based on ABI (Association of British Insurers) sector averages, net of charges with gross income reinvested for four years to 7 April 2019. Based on £400,000 initial savings and income payments totalling £20,000 a year, taken monthly. For illustration purposes only. Past performance is no guide to future performance.

 

Notes to Editors

  • In the UK, Aegon offers retirement, workplace savings and protection solutions to well over three million customers and employs approximately 3,450 staff. More information: aegon.co.uk
  • As an international life insurance, pensions and asset management group based in The Hague, Aegon has businesses in over twenty five markets in the Americas, Europe and Asia. Aegon companies employ over 28,000 people and have millions of customers across the globe. Further information: aegon.com

*Figures correct as of January 2019