Are lower pension returns and higher withdrawals raising drawdown risks?

In 2016 and 2017, the average pension fund delivered double-digit growth of 15.7% and 10.5% respectively, however returns have been subject to increased volatility in 2018.

The average pension fund fell by 3.8% during Q1 2018 before rising by 4.4% in Q2 2018. Pension fund returns proved more subdued in Q3 2018, rising by just 0.9%, with almost 40% of funds failing to deliver any growth at all.

The data shows that pension funds have made a poor start to Q4 2018, falling by 4.1%, which puts average returns on course for a fall of 2.9% in 2018, its first year of losses since 2011.

The drop-off in pension fund performance comes at a time when the latest FCA data shows that for drawdown policies where a regular withdrawal is being made, the withdrawal rate has increased from 4.7% in 2016/17 to 5.9% in 2017/18.

Richard Eagling, head of pensions at Moneyfacts, said: “Pension freedoms have placed a much greater onus on individuals to take control of their own retirement planning, and in an environment where freedom has been so positively promoted, it is no surprise that the most flexible decumulation product drawdown has become the most popular choice. However, in facilitating this trend pension freedoms have encouraged far greater numbers of individuals to take on the longevity and investment risks associated with drawdown themselves.

"It is still unclear as to whether drawdown customers are making sustainable withdrawals, although the fact that the average pension fund is down by 2.9% so far this year indicates that this could soon be a greater issue.”