Stock market falls could spell disaster

News


13 Jan, 2016

Stock market falls could spell disaster

Pension freedoms always come with risk; there is always the chance that people could take the money and blow the lot, get ripped off by scammers, or invest it in something absolutely unfitting. Now the experts are warning that even those who withdrew their pensions cash for what they thought were very sensible investments may face a nasty surprise.

A Certified Financial Planner at Chase de Vere, Patrick Connolly, says “Those who withdrew their pension pots and invested in the stock market may have thought they were making a wise and careful decision”.

However, recent tumbles in markets around the world may have had a devastating effect on their investments. The FTSE 100, for example, has fallen 11%.

Undoubtedly there will be those who made a careful decision to invest in the stock market, based on an understanding of the risks. They will have plenty of money set aside so they do not have to touch the portion invested in shares for years, allowing for plenty of time to recover.

On the other hand, there will be others who Connolly says: "Might not have sufficient disposable income or other assets to make up for any investment losses." It means they will need to withdraw some of the money from shares in order to pay for their day-to-day costs, which will cement their losses.

For some investors this could be further compounded, by the structure of how they are funding their retirement. If, for example, they planned to leave it invested and live off the income and rising value, then they could have found it impossible during market turmoil, and dipped into their original investment.

Hargreaves Lansdown did the maths for the period between 2000 and 2010 - a tough time for the stock market. It used the example of a 65-year-old man with £250,000 of pension savings who went into a drawdown arrangement - withdrawing £15,000 a year (the same as the amount he would have received from buying a level annuity).

Within three years, a combination of market falls and cash withdrawals would mean his pension pot had halved in value. After ten years it would be worth just £102,000, and if he bought an annuity at that stage he would have received just £8,200 a year.