6 pension tips to consider during market uncertainty – drawdown and lump sums

Volatile markets are always challenging, especially for people taking an income or lump sums from their pension, who have chosen to stay invested in the stock market. The Brexit vote, for example, and now the coronavirus outbreak aren’t the first political and socio-environmental events to test investors, and probably won’t be the last.

We know it’s easier said than done, but successfully managing a drawdown plan, or a pension you’re withdrawing money from (like an HL Self-Invested Personal Pension (SIPP), requires a level head and a long-term approach.

Although there’s no one size fits all guide for market uncertainty, we’ve come up with 6 tips to help with managing a pension.

This article isn’t personal advice. If you're not sure what’s right for your circumstances, please ask for advice. Our advisory service can offer you one-off financial advice, or ongoing advice.

1. Remember your objectives and risk appetite

One of the reasons people choose to keep their pension invested and take drawdown or lump sum withdrawals, is for the flexibility around income withdrawals and the tax benefits on death. But if you’ve chosen one of these options you’ve also accepted a level of risk. You should also ensure you have enough secure income to cover your essential costs.

Stock markets don’t rise in a straight line, and the need to weather a market storm is something all investors are likely to experience at some point. No matter where you invest, there’s the potential for growth, but also a possibility of loss. That’s why it’s so important to continue to keep your SIPP or drawdown pension under regular review, making sure your choices continue to suit your circumstances and attitude to risk. Doing this regularly could put you in a better position for tough times ahead.

2. Now is the time to use your cash buffer

As a general rule, everyone should hold at least 3-6 months’ worth of expenses in easily accessible cash, most likely in a bank or building society savings account. Investors should also have some cash readily available for planned income (at least 2 years’ worth, or more preferably).

You could also consider keeping a little extra as cash to fall back on. This will probably depend on how you’re taking money from your pension – maybe around one years’ worth if you’re taking the natural yield (income from your investments). And perhaps two or three years’ worth if you need to draw from capital (more on these strategies below). This doesn’t have to be held in a pension. But it should be readily available when you need it.

Remember, holding large amounts of cash may offer shelter in the short term, but it’s very unlikely to be a good long-term investment strategy, even in times like these – as there’s little growth potential.

If you don’t have a cash buffer, don’t worry, you could gradually build one up. This doesn’t necessarily mean you should sell investments though. You could consider building up cash over time using your investment income and depositing the cash rather than re-investing it (or withdrawing it). Everyone’s circumstances are different, so it’s important to think about what is right for you.

3. Consider how you’re making withdrawals

Falling markets could be particularly damaging for those drawing from capital – which means selling investments to fund your income withdrawals. When you sell after markets have fallen, there’s no chance to make up the loss as you’re continuing to drain your pension through withdrawals. The issue is if your investments don’t then grow by at least as much as you withdraw (regardless of market conditions), your pension will run out sooner than anticipated.

If you can’t afford to stop withdrawals, you might consider only taking the natural income your investments produce (this is also called the natural yield). Investors who stick to this strategy, might be better placed to navigate choppy markets, as they’re leaving the underlying investments intact to try and weather the storm.

That being said some companies are reducing or even cutting dividends completely as they navigate through the current crisis, so income and the value of your pot will still fluctuate. If you can afford to, the best approach could be to reduce your spending now and either take no income at all, or at least the bare minimum.

The chart below compares capital and natural yield (income) strategies and the effect this could have over time. The example shows what would have happened to the capital value of a £250,000 drawdown pension over the last 20 years if invested in the UK stock market, taking either the natural yield as income or 4% of the initial value (£10,000) taken each year as monthly withdrawals.

UK stock market performance - natural yield vs capital withdrawals

Past performance is not a guide to the future. Source: Lipper for Investment Management, 28/02/2000 to 29/02/2020

4. Sit tight, or rebalance?

Investments will fluctuate in value, and it’s likely the investments in your pension will rise and fall at different rates.

You might be happy with your present investments and how they’re currently balanced to meet your risk appetite. If you are then although it can seem like the hardest move to make, sitting on your hands could be the best thing to do right now.

If you find you’re no longer happy with the balance of your portfolio, you could consider switching from investments which have done better into investments that haven’t done as well but in which you still have conviction to help even out your portfolio. You should consider doing this in stages and over time to mitigate the risk of bad market timing.

It’s easy to log in to your HL SIPP account to check your investments. If you have online access you can view an analysis of your portfolio by logging in to your account and, from your Portfolio Overview, select the Portfolio Analysis tab.

Make sure you read up on what investment brokers have to say about the investments you hold. You can also compare long term performance and charges with similar investments. You can typically find this information on most investment factsheets. We also offer share insight and fund research which could help.

5. Get a free annuity quote

Don’t forget you’ve got the option to buy an annuity (a guaranteed income for life). If you need more secure income, you might consider buying one. Rates have taken a tumble over the last few years, but they’re always changing, so it’s worth getting an up-to-date quote to see how much you could get. By adding your health and lifestyle details when getting a quote, you might qualify for a higher annuity rate. Quotes are guaranteed for a limited time only and you won’t be charged to get one.

Annuity rates depend on your personal circumstances, the options you choose and the amount of pension you choose to exchange. Once set up annuities can’t normally be changed. As always, consider your options carefully, and if you’re not sure seek guidance from Pension Wise or get personal advice.

6. While you’re at it, check your nominations

It’s not nice to think about, but it’s important to plan for what will happen to your benefits if you become unable to manage your account yourself, and after you’re gone.

It’s worth considering appointing a power of attorney if you haven’t done so already, so someone can look after your affairs if you can’t. You can also let pension providers know who you’d like to receive your benefits when you die. Your pension nomination isn’t binding, but will give the trustees an idea of your wishes which have to be taken into consideration.

If you have an account with HL, the easiest way to update your pension nominations and amend these details is online. You can give us details of your power of attorney to be held on record by posting us the original or a certified copy.