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The impact of dividend cuts on drawdown investors

We look at what drawdown investors could do following recent dividend cuts.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Companies are scrapping, suspending or delaying dividends in the wake of the coronavirus pandemic. This is a painful time for people relying on their investment income to help fund their retirement.

Below is our view on what drawdown investors could do.

This article isn’t personal advice. If you're not sure what’s right for your circumstances, please ask for advice.

Focus on your objectives and risk appetite

Arguably the most important thing you can do is avoid making rash decisions. And we also suggest against making changes based solely on dividend yields.

Yields tend to look at past payments, so don’t reflect what you’ll get in the future. As we’re now seeing, companies can change their dividend plans. Even if dividends do bounce back in the second half of the year, it’s unlikely the market will pay out as much this year as last.

It’s important to keep your SIPP or drawdown pension under regular review, making sure your investments still fit your circumstances and attitude to risk. We normally suggest doing this every few months, but it’s also important to check in when we see big shifts in the markets – it might have changed the weightings of your portfolio from what you’re comfortable with.

You might be happy with your investments and how they’re balanced to meet your risk appetite. If you are then, although it’s tough to do, sitting on your hands could be the best thing to do right now.

If you’re no longer happy with the balance of your portfolio, consider gently rebalancing. You can switch from investments which have done better into investments that haven’t done as well, as long as you’re still confident in their long-term outlook. This can help even out your portfolio. Think about doing this in stages over time.

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.

There’s lots of help available. Read up on what experts have to say about the investments you hold. 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.

For peace of mind, our advisory service can offer you one-off financial advice, or ongoing advice.

Where possible, cut spending and use your cash buffer

If you’re making withdrawals from drawdown and can afford to, the best approach could be to reduce your spending now, only drawing on investments when absolutely necessary.

We’ve long preferred taking the natural yield – the income your investments produce – over selling investments to fund retirement. The problem investors have in the current climate is that yields from shares are likely to fall significantly, at least in the short term. Those taking a natural yield will see their income fall.

That said, while dividends look set to be very low in the short term – it’s possible to take a rosier view as you look further out. For those who can, we strongly suggest turning to cash buffers for the short term, rather than selling investments.

Assuming lockdowns don’t drag on into the summer – and that’s quite a big assumption – then lots of companies could still be profitable this year. Some industries could even see pent up demand lead to a bumper second half. We’ve also seen several dividend announcements branded as delays or suspensions, rather than cancellations. If events turn out better than feared, we could see a better than usual round of final dividends, although there are no guarantees.

The longer the lockdown lasts, the more debts will be built up. These could take years to pay down, and that will restrict the cash available to return to shareholders.

Falling markets could be particularly damaging for those drawing from capital – 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.


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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