Investors are enduring the first ‘bear’ market (when stock markets fall by 20% or more) since rules were introduced in 2015 giving people total flexibility over how they spend their pension pot from age 55.

In fact, the uncertainty gripping markets since the coronavirus outbreak hit means millions are nursing short-term losses of 40% or more. The extent of the impact of the pandemic depends of course on the mix of assets you hold in your portfolio, with those mainly invested in equities, such as FTSE 100 companies, taking severe punishment.

Such significant falls in fund value present challenges to the more than 150,000 people who have entered drawdown each year since 2015.

In particular, anyone taking big income withdrawals in the early years of retirement while also suffering large negative investment performance may need to re-evaluate their strategy.

Tips for people in drawdown and worried about coronavirus

Review your withdrawals and investments regularly to make sure your retirement income strategy remains sustainable.

If you have any cash investments, consider drawing on these first rather than selling down your capital to fund your retirement. This will give your underlying investments better opportunity to recover value after a market dip.

Using just the ‘natural income’ your investments produce via dividends can also mitigate the risk of pound-cost ravaging, as it means your capital remains untouched. However, you may have to accept a variable income as a result.

Don’t panic buy or sell investments based on short-term, uncertain market volatility – this risks layering on costs without any guaranteed benefit.

Income withdrawals and poor performance a bad mix

What happens when large income withdrawals are coupled with poor investment performance?

While up until recently those in drawdown are likely to have seen their retirement incomes buoyed by positive investment returns, the same may not be true in the near future – and at least until the current volatility has subsided.

In 2018/19, withdrawal rates of 8% or more were the most common across all pot sizes in drawdown except the largest (£250,000 and above in value, where the most common rate was between 2% and 4%), according to official data from the Financial Conduct Authority (FCA).

It’s worth noting these percentages are based on individual pots and so don’t take into account people with multiple pensions or other assets. AJ Bell’s own research points to average withdrawal rates as a proportion of all private pensions in the region of 4% to 5%.

The sustainability of withdrawals at these levels will come under pressure where market falls are experienced, particularly in the early years of drawdown.

Let’s assume someone is taking 5% of their initial fund value as a retirement income, rising by 2% a year in line with the Bank of England’s inflation target.

If they suffered a 20% hit on their underlying investments in the first year in drawdown and then 4% growth thereafter they could see their pension pot run out after 18 years – three years sooner than if they suffered the hit 10 years into retirement (and 4% growth otherwise).

By contrast, someone who enjoys 4% growth throughout their retirement could take the same income for 25 years.

To put this into context, whilst on average life expectancy at 65 is 18.6 years for men and 21 years for women, the Office for National Statistics says a man has a one in four chance of living another 27 years, while a woman has a one in four chance of living another 29 years.

Tips for people approaching retirement and worried about coronavirus

Think about your objective. If you’re within five years of retirement and are planning to use your fund to buy an annuity, you should be reducing your exposure to potentially volatile equities so your returns are more predictable. If you’re planning to stay invested through drawdown then your investment time horizon might be longer, meaning you can potentially ride out short-term fluctuations in performance.

If possible, consider delaying retirement until we have more certainty about what the future holds (clearly not an option for everyone).

Some people may be tempted to access taxable income for the first time from their SIPP, perhaps in anticipation of tougher times ahead. Be aware that if you do this, your annual allowance will be cut from £40,000 to just £4,000.

The importance of staying engaged

This is exactly why drawdown investors who are taking an income from their capital need to build a sustainable withdrawal strategy and review that strategy regularly. These reviews should occur at least once a year, ideally with the help of a regulated financial adviser.

Periods of significant volatility such as the one we are experiencing now are also a good opportunity to give your retirement strategy a health check.

If you are in the early stages of drawdown and have seen the value of your fund plummet recently, it is important to keep calm but not stick your head in the sand.

If markets do not recover in the short-term, it may be necessary to reduce income withdrawals in order to ensure you aren’t risking retirement ruin.

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