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The pension freedoms have opened up far more options for retirees looking to spend their hard-saved pension pots, with an annuity no longer the sole option. Indeed, drawdown is booming, yet to really make the most of this option, it's important to have the right investment strategy.
New research from Aegon shows that drawdown is now by far the most popular option for retirees, with the number of those seeking such a product having more than trebled since the pension freedoms were launched in 2015: income drawdown accounted for 46% of retirement sales between July and September 2016, up from 15% in the same period in 2013, before the freedoms came into effect.
However, the investment strategies of those retirees are "still playing catch up", with investors sticking to familiar strategies rather than more tailored drawdown solutions, which means they may not be making the most of this new form of retirement income – and they even run the risk of losing out.
Multi-asset strategies are proving to be most popular with those in drawdown, with the largest amount of money in the past year being invested into this asset class (45%), followed by equity growth (18%), bonds (15%) and equity income (12%).
This shows that many are looking to reduce risk, said the report, with multi-asset arrangements being a great way to spread risk and exposure across a range of different areas. Yet despite this, retirees are actually far more exposed to market fluctuations than under previous pension arrangements – with an annuity, there's no more investing and you instead get a guaranteed income based on the size of your pot at retirement, whereas drawdown requires your pot to remain invested until you withdraw the cash.
This, in turn, means that retirement incomes could be compromised if markets fall; the report said that "a significant market shock could wipe years off retirement income unless investment strategies are de-risked to meet the particular requirements of retired investors", so it's becoming increasingly important for retirees to understand the market and invest accordingly.
"Drawdown's popularity has rocketed since the pension freedoms, but retirees' investment choices are still adjusting to the needs of those that choose to remain wedded to the markets in retirement," said Nick Dixon, Investment director at Aegon. "Drawdown investors are largely favouring tried and tested brands and investment strategies over newer, more tailored options.
"As a result, there is a mis-match between the long-term growth objectives of many of the strategies being used, and the near-term income needs of retirees who use them. Retirees are also now more exposed to market highs and lows than they have ever been."
This means you need to take an active role in planning for your retirement income to determine the right kind of investment strategy, and so getting the right kind of financial advice is essential. Make sure to discuss your needs with a professional, independent financial adviser rather than going it alone – the pensions landscape is now far more complex than prior to the freedoms, so proper advice can give you the best possible chance of making your money go further in retirement.
Speak to a financial adviser if you're thinking about your retirement income options
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