Nearly three quarters, 72%, of retirees class themselves as risk averse. However nearly a third, 29%) have some of their ongoing income linked to stock market investments. Proportion of retirement income impacted by stock market fluctuations set to rise as defined benefit pensions decline and take up of pension freedoms increases
The pension freedoms have given people newfound flexibility to withdraw money flexibly from their pensions, removing any perceived requirement for most people to buy an annuity upon retirement. Since April 2015, flexi access drawdown which keeps peoples’ pension money invested in the stock market while allowing them to take an income has overtaken annuities in popularity2 with the number of people taking their retirement income from drawdown accounts having doubled to 158,0003 in the first year of freedoms.
While it is good news that so many people are able to take advantage of the new flexibility, the shift represents a fundamental change from annuities whereby people bought a guaranteed income for life. By opting for drawdown people are more exposed to stock market fluctuations as the value of their savings can rise and fall over time. This represents a challenge when 72% of today’s retirees class themselves as risk averse when it comes to their retirement income. 51% of over 65s went as far as to say they were willing to take no investment risk with their retirement income.
Steven Cameron, Pensions Director at Aegon, said: “There’s been a clear shift in the retirement income market, with people increasingly opting for drawdown over annuities at retirement. Today the number of over 65s with exposure to the stock market is relatively low but we fully expect this figure to rise over time as people have less of a defined benefit pension and opt for flexible retirement income products. Given the majority of retirees remain cautious about investment risk, there’s a real challenge for the industry to ensure people are comfortable with their post-retirement investments with financial advisers crucial in helping their clients invest in line with their appetite for risk.
“While the pension freedoms have heralded a new era of flexibility, retirees can still opt for security without having to purchase an annuity. Guarantees can be added to drawdown policies to ensure a set income for life regardless of stock market performance. These drawdown with guarantees products offer flexibility but with insurance against market downturns.”
The report is available here
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