Pension withdrawals up as cost of living rises

Value of funds in drawdown drops 11.6%, with retirement plans ‘between a rock and a hard place’.

The average value of income withdrawals from pensions in drawdown with interactive investor rose in January and February this year, as the cost of living bore down on older people living off their pension pots.

The amount customers with interactive investor SIPPS in drawdown typically withdrew from their pensions at the start of the year (January and February) was 8% higher than the long run average at £1,927, compared with a regular monthly withdrawal average of £1,785.

The January 2022 pension withdrawal average of £1,944 was up by 25% on the long-run average January withdrawal payment of £1,559, while withdrawals in Feb 22 were up 7% to £1,910 compared with the average withdrawal for February of £1,787, over the previous four years.

At the same time, the average value of a SIPP held on the platform among those aged 60 and over (the average age at which customers start taking a regular income), fell by 8.9% from a peak of £321,512 at the end of December 2021 to £293,013 at the end of February 2022, as a result of falls in the value of the stock market at the beginning of the year, preceding the war in Ukraine. By 10 March, the average SIPP value for the over 60s had fallen further to £284,230 – a total decline since the start of the year of 11.6%.

Double depletion

This ‘double depletion’ effect, of falling stock market values combined with an increasing need for more cash to cover living costs, will be troubling for those who are dependent on their pensions for income or who are due to retire soon.

The pressure on older people to access more cash from their pensions to cover the rise in energy, food and petrol comes amid warnings of further sharper price rises as a result of the war in Ukraine, as well as further possible shockwaves for global stock markets, which underpin pension values.

The impact of a 10% fall in the value of a pension portfolio for one year, before an eventual recovery to 3% growth a year, together with an 8% rise in the average amount withdrawn monthly from £1,785 to £1,927 for two years, could mean a pension pot on retirement at age 65 worth £300,000, would fall to a value of £270,000 and would run out at around age 73 instead of age 75 (assuming a tax free lump sum of 25% is taken).

Trading behaviour within SIPPS among over 60s

Interactive investor customers who are over the age of 60, the age at which pension investors with ii tend to start taking a regular income from their pension, appear to have responded to market conditions and changes in living costs by selling a higher than usual proportion of their investments in the first two months of the year.

The long run average of sells as a percentage of buys among the over 60s is 42.5% among ii SIPP customers. In January, this rose to 51%, before falling back slightly to 48% in February.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “All investors are stuck between a rock and a hard place, but none more so that retirees trying to live off their pensions.

“Not only do older people face a disproportionate impact on their living standards because of the greater than average proportion they spend on essentials such as energy and food, they are also more exposed to the slings and arrows of global stock market fortunes. For those who are in drawdown, their investments are their income.

“For retirees, watching the value of a pension pot going up and down is like watching a bank balance rising and falling without you having done anything at all.  Scary, in other words.

“What we are likely to see over the coming months is retired people paying more attention than ever to that fine balance between withdrawing what they need to cover living costs and keeping enough in the pot to sustain them for their whole retirement.

“Annuity rates may be creeping up as interest rates rise, but still remain unappealing, particularly now that stock market falls have dented fund values. Many will feel they have no choice but to leave their money invested for as long as possible to wait for a recovery.”

What can you do to beat the ‘double depletion’ effect on pensions:

• Take out as little from your pension as necessary. Investment losses are only investment losses once the investments are sold.
• Consider carefully the timing of larger withdrawals and base your withdrawal amounts on seasonal changes in spending, for example, consider withdrawing less in the months when the heating isn’t on.
• Remember stock markets can rise and fall in value, but high inflation is eating away at cash savings every day, so dependence on cash is not the answer to value depletion, either.
• Don’t panic. When recovery comes, the only way to benefit from it is to remain invested.
• If you have a Self-Invested Personal Pension, review the risk level of your portfolio and consider how you might want to adjust this when the time is right, according to your plans to take an income.
• Seek independent financial advice.
• Contact Pension Wise, the free government pension guidance service https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise.