Pound cost ravaging – protecting your pension

12 Aug 2020


We often hear of pound cost averaging or unit cost averaging in relation to our pensions. The cheaper the units in a fund are (when markets are down), the more we can purchase, thus increasing the total fund value when markets go up again. 

This is good news for your pension if you still have several years of contributions left.

Pound cost ravaging works the opposite way. 

If you have existing investments in funds and the markets drop, then you lose a percentage of the total value of your portfolio. If you had time on your side, then it would balance out, but if you are on the verge of retirement or are already in retirement, then you have no time to make up the losses.

This leaves retirees with less money in their private pension pots which allow for less monthly income. Especially for pensioners who are taking income draw down and have not invested in an annuity.

Example. If you were taking a 5% inflation-adjusted income from your retirement nest egg and your invested fund takes a 20% hit in your first year of income drawdown, you could run out of money after only 18 years. This is 3 years sooner than planned. 

How can you protect your pension when markets crash?

• Pause withdrawals – try to put your drawdown instalments on hold if you can. Cut your spending or rely on other cash sources until markets realign.
• Revise how much you withdraw - if possible, you could reduce the amount you withdraw monthly and take only the bear minimum or take only natural income which is the interest and dividends that your capital earns.
• Diversify your portfolio – your financial adviser sets up your retirement fund with a diverse multi-asset mix to protect it against volatility.  You could consider just withdrawing interest from the funds that are performing well and leave the worst performing ones alone. Your adviser will rebalance your portfolio accordingly.
• Have a cash reserve – Most income draw down products allow you to keep or hold back a few years’ worth of income in cash. You could possibly use you cash investments first to live off, giving your investments more time to recover value.
• Consider alternatives to draw down -  if you are getting on in the years and don’t want to be hassled with managing your portfolio, then you could turn part of it into an annuity with a guaranteed monthly income regardless how the markets perform. - Dailymail.co.uk

It is always advisable to chat to your deVere Acuma adviser about your retirement income options when markets are underperforming. [email protected]

Please note, the above is for education purposes only and does not constitute advice. You should always contact your deVere Acuma adviser for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.