The plus side of an ASP or income drawdown is the fact that an investment can significantly increase in value. The bad news is that pension holders who go down this path are taking a big risk. There are no guarantees with this sort of investment which can fall dramatically in value. This could result in your pension fund becoming too small to sustain you through retirement years.
It is entirely possibly to lose thousands of pounds with a bad decision or two so only those who can afford losses need think about making this investment. Those who are reliant on their pension fund to see them through retirement should really consider purchasing an annuity instead. These are safer and ensure that you will have a reasonable level of income when you stop working. Whatever way you are leaning, do not make any decisions without the advice of an independent professional.
Safe And Sensible
There are also a host of other charges that eat into your pension fund including mortality drag and maximum income restraints. When you add all of this to the potential for loss in both ASP’s and income drawdown, it is necessary for you to either have other investments on standby or else have a cavalier attitude to money.
Although you could place your money in so-called low risk investments, the amount of interest they generate is pretty small and may not be enough to keep up with the income you are withdrawing. On the other hand, high risk investments fluctuate rapidly with the return on investment not as high as advertised.
It is a good idea to split up your portfolio rather than depend on one source of income. For example, you may elect to have cash to give you an income for the first few years of retirement. Fixed interest assets are designed to guarantee a certain return on investment which can shield you from any losses incurred on high risk investments. Equities are also another option which offer the chance of receiving high long term returns through the processes of dividend income and capital growth.
It needs to be restated that the risk associated with income drawdown or an ASP is very real and could result in a loss of income that is devastating. There is the possibility that your entire pension pot could go up in smoke leaving you nothing but the state pension to look after you once you are too old to work. You could also leave your spouse in hot water as he/she will have nothing left in the event you die. High risk strategies are a real threat to your financial security. It is a bad idea to invest everything into one fund. In the event that the company you are investing in goes bankrupt, you will have no back up plan.
Because of low interest rates, investing in cash only is also risky. Even though you will not lose money through poor investment choices, you could still cause the fund to disintegrate by withdrawing income faster than the fund grows.
The problem with taking a large amount of money out of the fund is that poor investment performance could lower its value thus ensuring there is less money available to purchase an annuity. If you were to continually withdraw the maximum allowable amount, it is likely to result in a situation where such actions are no longer financially viable. There is also the possibility that annuity rates will decrease from the time you first went into drawdown which lowers their real value.
Losing money in retirement is a doubly devastating blow because the odds of retrieving it are slim. With life expectancy rates increasing, there is also the possibility that you will not have enough money to live on after a certain point.