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CASE STUDY

With the media awash with pension reforms talk, it’s easy to get swept along in it and go with what’s new. Dip your toe. Why not? After all if it’s new, it’s got to be better, right? Hmm, potentially but it depends on your circumstances as a friend of mine’s cousin, Robert*, found out.  Before venturing down the path of income drawdown, having sufficient cash to comfortably survive for a minimum of one year’s worth of expenditure, and at least £250k in the bank, is arguably the place to start and, therefore, a good position to be in**.

Robert however was not in this position. He’d worked hard all his life and him and Linda*, his wife, had it all planned when retiring this year. Let’s visit our daughter in Australia, travel a bit, of course take up golf and generally take life easier. Better still, with annuities scrapped, Robert was a happy man. Why should anyone tell him how much money he can access each year anyway, as he’s a responsible 65 year old man capable of managing his own money, right? He is indeed 65, but it’s the factors outside of Robert’s control that had the impact. The recent China crash  made a dent in Robert and Linda’s pension , with £91bn in total being shed from the FTSE 100 overnight***.  At the start of the year the FTSE 100 index stood at 6,547.80**** dropping to 5961.5 **** (as at 24th September),  a drop of close to 10% which, in Robert & Linda’s case means the invested value of their pension pot has dropped by £20K to £180k and that’s before they’ve taken account of any income that they have also drawn from the pot. This is a lot of money when you’re not working and earning any money to replace it!

That’s the risk Robert and his wife took with income drawdown, but he wasn’t alone, with £720m being invested in this way in the first 2 months of reforms being introduced (Association of British Insurers)**. What’s the alternative? Purchasing an annuity, guarantees the payment of a pension for the lifetime of the claimant rather than a potential blip overnight affecting dreams with a nasty wake-up call and reality check. Some would argue, a balance of annuities and cash for ‘Robert and Linda’s essentials’ would have made more sense and drawdown for ‘Robert and Linda’s nice-to-haves’ would have struck a better balance?

Of course the nature of stock markets is that they rise and fall and are a long term game, but when you only have a certain time slot available, and only a limited amount of money to enjoy, it could be the case of your money ‘goes south’ before you do.

* The names have been changed to protect identities
**’Turmoil in the markets threatens UK pensions’, The Sunday Times, Ian Cowie, 30th August 2015  http://www.thesundaytimes.co.uk/sto/business/money/pensions/article1599305.ece
*** ‘How did Black Monday start?,The Daily Telegraph, Jon Yeomans, 24 Aug 2015                                                                                    http://www.telegraph.co.uk/finance/china-business/11821043/How-did-Black-Monday-start.html
****Yahoo  Finance,  FTSE 100 Historical Prices – Prices referenced are from 2nd January and 24th September 2015                                         https://uk.finance.yahoo.com/q/hp?s=%5EFTSE