Never mind blowing everything on a Lamborghini, just taking a modest income could wreck your pension if you're not careful. New technology could be the answer
Buying a Lamborghini is the quick way to blow your pension savings, but the slower, arguably more dangerous, route is to make the regular withdrawals you need, using the new freedoms, without keeping a beady eye on the markets and their effects on your fund.
As I wrote here a few weeks ago, making regular withdrawals of a predetermined amount – which, after all, is what most of us need to meet our outgoings – can be devastating for the long term health of your pension fund at times when the market is low.
This is because, when the price of the shares or fund units is low, more of them need to be sold to raise the required sum.
Selling more units means less income is produced naturally from dividends, so even more units have to be sold next time to produce the same amount.
A vicious cycle is established and your pension pot runs dry – or you have to cut your income drastically.
The solution is to be aware of the state of the markets when you make withdrawals and be prepared to reduce the amount you take if need be, perhaps using your cash rainy day savings to meet the shortfall.
But how many people, using the new freedoms in these early days, will even be aware of this problem, let alone be equipped to make the judgements about portfolio construction and management of withdrawals needed to keep the pension pot in good shape?
One solution is to use a financial adviser, although this costs money and not all advisers themselves have the skills needed to handle this problem.
Online planning tools exist, but they still require the saver to make the actual decisions.
These tools will give you information but they won’t say “you need to cut your income by 20pc this month”, for example.
But that may be about to change. There is a huge need for automated tools that stand midway between the “information only” variety that exists now and the full, individualised service that you get from a human financial adviser.
Things are further advanced in America, where “robo advisers” are making great strides. Firm with names such as Betterment and Wealthfront are among the fastest growing investment firms in the US, as investors increasingly seek guidance at low cost.
They have yet to make an impact here, but one British firm whose boss I spoke to last week is developing an online tool that aims to monitor your pension as you make withdrawals and send you alerts if the income you are taking is unsustainably high.
The benefit of such a tool, if it is well designed and trusted by the user, is that the saver won’t need to actually understand the subtle reasoning behind the need to make a (hopefully temporary) cut to their income – they will simply follow the tool’s instructions to ensure that their fund remains able to support them for many years to come.
Having the work of monitoring their fund taken off their shoulders will become more and more important as they get older and less inclined – or less able – to keep abreast of the arithmetic. And let’s face it, these sums are not simple at any age.
The firm behind the online tool hopes to launch it before the end of the year, with a cost in the region of a couple of hundred pounds – far less than you will pay a financial adviser to do the job. Then you would hope that later versions, and those that emerge from competitors, will become more sophisticated and probably cheaper too.
Let’s hope too that there isn’t a stock market crash in these early days of the pension freedoms that catches savers out and sees their retirement funds permanently diminished before they had the tools to manage them properly.
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