Should you continue to take an income from your pensions? All clients taking, or considering taking, flexible withdrawals from their pensions during this uncertain time should be aware of the danger of ‘pound cost ravaging’ and its potential to deplete your funds too quickly.
Put simply, pound cost ravaging is where you are taking a fixed income from your fund, but the fund is falling.
Let’s say you have a fund of £100,000 and take £5,000 pa income. In year one the fund falls by 10% so now you have £90,000 and are still taking £5,000. As a percentage, that’s gone from 5% to 5.5%.
At the beginning of year two, you have £85,000 (considering 10% fall and the £5,000 income). You take another £5,000 income, but that’s now 6.25% of your fund, which falls a further 5% to £80,750 (£75,750 after you’ve taken your income).
At year three, things are looking up and markets increase by 5% pa for the next three years, but you’re still taking £5,000, so your fund looks like this-
| Year | Fund at the beginning of the year | Investment growth @ 5% | Income taken | Income taken as a percentage | Fund at end of year |
| 3 | £75,750 | £3,787.5 | £5,000 | 6.6% | £74,537.5 |
| 4 | £74,537.50 | £3,726.88 | £5,000 | 6.7% | £73,264.38 |
| 5 | £73,264.38 | £3,663.22 | £5,000 | 6.8% | £71,927.60 |
You get the picture, your fund is depleting even though it’s growing at 5% per annum, as the income you’re taking is gradually becoming a larger percentage of the remaining fund.
If you are taking withdrawals, it is important to contact your financial adviser now to get advice. For most of our clients, we make sure that they have a healthy emergency fund so switching off income withdrawals and living on cash to give your pension a chance to recover from the recent falls is the best option but everyone’s individual circumstances are different.
We are a firm of Independent Financial Advisers (IFA’s). This means that the financial planning advice we give is unbiased. We will look at all the financial solutions available to you from the “whole of market”. This is unlike some financial advisers, who will only recommend their own products or work from a limited panel.
Why not contact us today to arrange a meeting. The initial “getting to know you” meeting is at our expense and without obligation. Meetings would normally be arranged at your home or at one of our offices located at-
Telephone meetings may also be arranged. Whatever is best for you.
If you have any thoughts or views about this article, “Should I continue to take an income from my pensions?”, then please let us know.
The information contained in this article is for information purposes only and does not constitute advice. No action should be taken based on this information alone. Anstee & Co is authorised and regulated by the Financial Conduct Authority (FCA).