WARNING: Pound cost ravaging is a rather technical concept. But it’s very important, particularly in the shadow of COVID-19, for anyone taking retirement incomes from their pension savings or contemplating it soon.
The pension freedoms that are in place nowadays mean that we no longer need to buy annuities for our retirement incomes. And we can start drawing down from pension savings from the age of 55. That’s all good, it gives everyone choices. However, as I’ve discussed before, stock markets that hold much of our pension savings are volatile by nature. And they’ve been displaying a lot of this in recent months, in the shadow of the pandemic.
This in turn presents a specific type of risk that we should be aware of, pound cost ravaging.
Pound Cost Ravaging: A Definition
So, what is pound cost ravaging? A good, if technical definition comes from Professional Adviser, a financial services news site:
‘Pound cost ravaging is a combination of volatility drag and sequencing risk, compounded by regular withdrawals. It can deplete pension funds quicker than expected. Poor investment performance in the early years of retirement can quickly reduce the value of a pension fund.’
Put another way, if you continue taking the same level of income from a fund during a downturn, you may find your fund drains quicker than anticipated. In some such situations, it may be exceedingly difficult – if not impossible – for the fund to recover.
Pound cost ravaging is a serious and often overlooked risk.
Retirement Income Worked Example
What’s more, it’ll change for the worse if the early years of the example show the worst returns, in this case negative ones.
So, What Can Be Done?
If you can delay, it’s worth doing so. A report by Legal & General asserts that 1 person in 6 aged over 50 and in work thinks they will delay retirement by an average of three years because of the pandemic. If you’re in a defined contribution scheme, delaying when you claim means that you leave it invested for longer, so you could have a bigger pension pot when you come to retire.
Like fixed return bonds or other assets. If you have a diversified portfolio, it’s easier to achieve, of course.
Again, if you can afford to, take less out of the pot when there’s a downturn. It’s in your long-term interest.
I know, it can be confusing. But that’s what I’m here for. I’m an experienced professional adviser with a constant eye on retirement incomes. We can discuss the options available to you, so you can make the best decisions for your circumstances.