Before 2015’s pension freedom reforms, pensioners were obliged to buy an annuity at retirement. Annuities were rotten value when interest rates collapsed after the 2008 financial crisis, but did at least guarantee a secure income for life.
Today, around three-quarters opt for drawdown, which means the value of their pension pot continues to rise with the stock market, but falls with it, too.
The recent stock market crash wiped a staggering £5trillion off global share values. Many who check their pension’s value will be thousands of pounds poorer as a result.
While markets have stabilised they won’t have recovered their losses yet.
Many will be hurting as new research shows the most popular investment funds among drawdown investors have taken the biggest hit of all – mega-cap US technology stocks.
The so-called Magnificent Seven US tech giants – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – have delivered breakneck growth in recent years.
Now their strong run may be over. Analysts fear they have become overpriced and must fall.
These stocks are heavily represented in drawdown investor fund purchases, new research from Hargreaves Lansdown shows.
Many won’t understand the risks they are taking as a lot of these funds don’t advertise that they invest in US tech, even though they do.
The Magnificent Seven make up almost a third of New York’s benchmark S&P 500 Index, vastly overshadowing the remaining 493 companies.
The most popular fund among drawdown investors is Legal & General US Index, with UBS S&P 500 Index also popular. Both are heavy on tech. Many investors may not realise that.
Other top 10 funds have huge US tech exposure without signalling the fact, including big sellers L&G International Index, Rathbone Global Opportunities and Fidelity Index World.
US stocks now make up such a big share of the global total that these funds are up to 70% invested in Wall Street.
Hal Cook, senior investment analysis at Hargreaves Lansdown, said US tech stocks started to slide in July as earnings from big names such as Amazon and Microsoft disappointed, amid signs the US is sliding into recession.
“Despite this, drawdown investors continue to take a long-term view and buy funds focused on shares, particular low-cost trackers offering broad market exposure.”
The stock market has calmed but further volatility is likely.
Some drawdown investors may be wondering whether to sell, but shouldn’t rush into a decision.
While stock markets are volatile in the shorter term, history suggests they generate superior growth and income over time. Investors need strong nerves, though, especially today.
Those who manage their own pensions via an online platform can log on at any time and see their pension value rise or fall in real time. It’s a frightening sight.
Rob Morgan, chief investment analyst at stockbroker Charles Stanley cautioned: “With huge media attention and minute-by-minute commentary it’s easy to be rattled, but it’s important to keep a clear head.”
He said there’s still a good chance the US may avoid recession and either way, it’s best to stay invested. “Volatility is an inevitable part of investing; a necessary evil and investors must be prepared to ride the ups and downs.”
However, drawdown savers should avoid getting over exposed to one sector, especially a volatile one like tech.
It is important to spread risk across a balanced mix of shares, bonds, cash, gold and property.
Also, keep some money in an easy access savings account that you can dip into for spending money when the stock market has fallen.
If you have to draw money from your pension during a crash you’ll get less and will miss out when stock markets recover, as they always do in the end.
