New research has found nearly a third of individuals over 65 have some of their income linked to the stock market.
Aegon, who carried out the research, expect this number to increase as more people reach retirement without a defined benefit pension and take advantage of the pension freedoms.
A growing number of retirees are choosing pension drawdown, where the pension pot remains invested and an income is taken from this invested pot, rather than the more secure option of a pension annuity.
According to Aegon, this trend represents a fundamental challenge to risk averse retirees.
Since April 2015, the option to use flexi access drawdown to draw an income in retirement from a pension pot has become more popular than annuity purchase.
In the first year of pension freedoms, the number of retirees using flexi access drawdown has more than doubled to 158,000.
It’s a positive move that more people are able to take advantage of income flexibility in retirement; there are lots of good reasons for choosing flexi access drawdown.
There are also some important risks involved, not least that you can run out of money if you experience poor investment returns, take high withdrawals, pay high charges, or there is a combination of these factors.
Aegon point out that choosing flexi access drawdown represents a challenge when 72% of today’s retirees class themselves as risk averse when it comes to their retirement income.
They found that 51% of over 65s went as far as to say they were willing to take no investment risk with their retirement income.
For the more than half of retirees who want to take no investment risk with their retirement income, flexi access drawdown is very unlikely to be the most suitable course of action.
Steven Cameron, Pensions Director at Aegon, commented:
“There’s been a clear shift in the retirement income market, with people increasingly opting for drawdown over annuities at retirement.
“Today the number of over 65s with exposure to the stock market is relatively low but we fully expect this figure to rise over time as people have less of a defined benefit pension and opt for flexible retirement income products.
“Given the majority of retirees remain cautious about investment risk, there’s a real challenge for the industry to ensure people are comfortable with their post-retirement investments with financial advisers crucial in helping their clients invest in line with their appetite for risk.
“While the pension freedoms have heralded a new era of flexibility, retirees can still opt for security without having to purchase an annuity.
“Guarantees can be added to drawdown policies to ensure a set income for life regardless of stock market performance.
“These drawdown with guarantees products offer flexibility but with insurance against market downturns.”
When making important decisions about taking retirement income from a pension, there are lots of factors to consider.
Do speak to us if you have any questions about the most suitable course of action.