Jeff Salway: Act to reduce the drawdown drawbacks

There will be other implications further down the line. They might include a review of the triple-lock on state pensions. Picture: Getty

Pension savers and those already in retirement can expect to be hit by the ripple effect on the UK economy from the vote to leave the EU.

The triple lock on state pensions will come under review when the dust settles in the wake of the EU referendum, experts have predicted, while those relying on their pension for their retirement income have been urged to review their arrangements.

People nearing retirement but still exposed to stock market investments may also have to take action if the market volatility proves sustained, as their funds seek to recover losses.

A sharp plunge in the FTSE on opening yesterday morning sparked fears about the impact on pension funds. But while short-term volatility will take huge chunks out of the value of investment and pension holdings, those with several years to retirement can afford to be patient, according to Derek Stewart, managing partner at Sam Wealth in Glasgow.

“Our clients who are nervous will just hang on in for the long term. The adventurous ones that have cash will looking to get in while the market is at a lower level, accepting that it will be a rocky road for a while but their interests are long term,” he said.

There are more pressing concerns for retirees in drawdown, however. The number of people entering drawdown to keep their funds invested on retirement and take income from it when needed has risen dramatically since pension reforms took effect last April.

Market volatility causes “pound-cost ravaging”, which refers to the impact on a pension when the same level of income continues to be withdrawn even as the fund value is falling.

“Drawdown clients tend rely on the income so not too many of them would be able to turn off the tap and source their income elsewhere,” said Stewart. “My advice if we do experience a sharp fall might be to use cash at this stage leaving the pension alone if possible.” The impact might not be so bad if the income is taken from the fund monthly, as the markets may settle by then in response to the Bank of England’s actions to stabilise the market.

“However if they are drawing their annual pension in one lump I’d recommend they change the frequency to monthly to limit the damage of the sudden market fall,” said Stewart.

Some drawdown investors will need to make changes to their investments, said Trent Lyons, financial analyst at Chiene & Tait Financial Planning in Edinburgh.

“For those in drawdown, short-term capital movement of pension assets will be unavoidable and a focus on the long-term should also be considered. Income provided through dividends will continue to be paid despite any movements and this natural yield should be used where possible to avoid drawing on capital at a low point in the market.”

People planning to buy annuities when they retire will also be affected by the fallout from the referendum. UK gilt yields, which underpin annuities and final- salary pensions, dropped to a new low on Friday morning, suggesting annuity rates could be about to fall further.

“We’re into uncharted territory now so it is hard to predict whether annuity rates have further to fall or how much lower they might go,” said Tom McPhail, head of retirement policy at Hargreaves Lansdown.

Rates are usually guaranteed for 14 to 28 days, so if you’re planning to buy soon and you’re worried they might fall you “should get your skates on”, McPhail added.

There will be other implications further down the line. They might include a review of the triple-lock on state pensions, which determines that they increase each year by whichever is highest out of earnings growth, inflation or 2.5 per cent.

David Cameron suggested during the campaign that a Brexit might lead to the triple lock being abandoned, noted McPhail. “The state pension is expensive, costing around £90 billion a year; it is a very big slice of the DWP budget so any changes to the state pension could involve substantial savings. If the Chancellor does now carry out his threat of a scorched earth Budget, then the triple lock could be an early casualty.”