In the examples, two portfolios with the same average return can have very different outcomes, depending on when the pot suffers a steep investment loss.
Both examples are for a person with a £100,000 pot, taking 5 per cent out a year, paid in monthly instalments.
Example one, where there is a huge investment loss in the second year, but a big gain in the third year, shows how the pot would be worth £79,580 at the end of year nine.
However, example two, where the large gain is in year seven, followed by a steep loss in year eight, shows the pot would be worth £88,018 in year nine.
As Mr Tully adds: “Some people going into drawdown may not have a suitable risk appetite or capacity for loss for drawdown.
“Drawdown is sensitive to volatility in the stock market and therefore can produce a higher income but there is a risk income could fall, or in the worst-case scenario, run out.”
Mr Lerche-Thomsen adds: “Retirees need to assess their capacity for loss, especially as any pension savings invested will be exposed to fluctuations in the investment market.”
This is where a blended solution could help to mitigate the volatility of the markets and the effect a protracted downturn could have on the drawdown portion of the pension, as the annuity element can help provide a stable income stream.
Without advice
Data from the Association of British Insurers (ABI) has shown recently that 94 per cent of non-advised sales have been made to existing customers.
This came after the Financial Conduct Authority’s Retirement Outcomes Review, which revealed the proportion of people buying without advice has risen from 5 per cent before the freedoms to 30 per cent today.
For Lorna Blyth, pension investment strategy manager for Royal London, this could lead to several dangers. She highlights these as:
• Whether their pot can meet their income needs for the length of time they need income for.
• Attitude and capacity for loss.
• They may live longer than they think they will.
• The impact of charges on their pot.
• The impact of market falls on their pot.
• How to cope with changes in personal circumstances.
Ms Blyth comments: “We would always recommend customers seek financial advice to understand the risks and benefits of the different options at retirement.”
Scams
There is also the risk that some people may be at risk of scams. Earlier this year, the City of London Police warned of the rise of financial fraud, with £42m being lost from pension pots to scams within two years of it coming into force.
