Many people may need to reduce the income they are taking from their drawdown pension funds in light of the effect of the Covid-19 crisis.
The dramatic initial falls in equity markets were followed by some recovery and were by no means fully reflected in portfolios that were diversified into bonds and other assets. But there may, of course, be further fluctuations ahead.
For those accumulating savings and contributing regularly to a pension, the general guidance has been to continue contributions and wait for recovery in the longer term. However, if you are taking regular withdrawals from your pension fund or other investments, you may need to review your pension planning.
Withdrawals from pension funds are typically derived from dividends, interest and sales of units in the funds you hold in your pension. So you benefit from the total returns of capital and income generated by your pension portfolio. If fund values rise steadily, the combination of income and capital withdrawals should provide a steady source of income.
Investors with well diversified portfolios have seen some of their holdings decline much less than other components. So the overall impact may well be much less than some headline figures with a less serious effect on future performance. Many investors have some cash reserves set up for such circumstances. If you are in this position, you might prefer to draw now on these cash reserves and wait to make further withdrawals.
A temporary reduction in expenditure and plans for future spending may be a prudent strategy. Bear in mind that some taxes are likely to rise soon to cover the costs of the pandemic.
Regardless of how you use your drawdown plan, it is essential to review the income you take from your investments on a regular basis to keep long-term plans on track.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
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