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Hargreaves reveals DIY drawdown customer behaviour

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Customers who entered drawdown contracts without an adviser following the pension freedoms have avoided classic amateur investing mistakes, new figures from Hargreaves Lansdown appear to show.

Experts have been warning the Government reforms would leave non-advised customers exposed to market shocks and at risk of crystalising losses.

But Hargreaves’ analysis of 27,000 self-managing customers indicates so far investors have dodged mistakes such as withdrawing cash too quickly when markets are low or panic selling.

The research found non-advised investors have taken an average income of 3.6 per cent, are holding cash reserves equating to 20 to 25 per cent of portfolios and did not react to recent choppy markets by selling.

In addition, the 10 most popular funds chosen by direct customers outperformed their sector averages by 4 per cent, says Hargreaves. Investors are holding an average of seven funds, which the firm says is a good balance between being overly-concentrated and unwieldy to manage.

Monthly cash withdrawals from Hargreaves' non-advised drawdown accounts
Monthly cash withdrawals from Hargreaves’ non-advised drawdown accounts

Hargreaves Lansdown head of retirement policy Tom McPhail says: “We’re still exploring the impact of the pension freedoms, however over this first year, it appears that self-managing drawdown investors haven’t all been rushing off to buy sports cars, in fact they’ve been managing their money pretty sensibly.

“They haven’t been panic selling investments when the markets were falling, they’ve maintained well-managed, diversified portfolios which have outperformed their sector averages; they’ve been taking sensible levels of income and they’ve also kept a prudent reserve of cash to tide them over when risk-based investments have fallen.

“The overall data paints a healthy picture of investors self-managing their drawdown arrangements effectively. However we can also see that more work needs to be done. Within these excellent figures, it is likely there are some investors who would benefit from better support and guidance to help them manage their retirement incomes effectively.”

Worldwide Financial Planning IFA Nick McBreen says: “I’m absolutely confident this will eventually unravel. As people age and their circumstances change they reflect back and often look for someone to blame. Hargreaves and other direct providers’ models are very clever, they push people away and get them to make the decisions.

“The DIY investor is believing the publicity that advice and guidance is not necessary. They think they can get the same outcome without paying, but when things turn against them it will go pear-shaped. They will look for someone to blame but they will only be able to blame themselves.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. This is clever? Leaving large amounts in cash where the charges are greater than the interest. Withdrawing less than 4% when annuities provide around 5.5% TO 6%.
    Seems daft to me. I always thought pensions were there to provide the best possible income in retirement. Perhaps these people are withdrawing small amounts so that they still qualify for benefits?

  2. Ralph Patterson 8th March 2016 at 10:45 am

    HL have a vested interest in ‘proving’ that direct investors can out-perform the market, which more or less anyone can usually do from a standing start, merely by choosing main sectors and picking last year’s winners. So the first year performance is above benchmark, but I would have been surprised if this had not been the case, as the investors will have done some due diligence at the outset. The real test will come when they fail to carry out proper reviews, and this will only become (painfully) obvious to them in hindsight.

  3. It will be interesting to see the same data this time next year as a comparison. Most customers entering flex drawdown from April last year would have benefitted from taking a tax free cash lump sum. Therefore, their requirement for pension income in the first year will be significantly less than year 2 onwards. Next year there could be a significant increase in the average % fund drawn down and only then will a clearer picture start to emerge. This years figures will not give an accurate picture.
    It’s also hugely favourable for HL if customers are encouraged to retain large cash balances, as by their own estimates they expect to earn 0.6% pa from interest compared to 0.45% for funds held within the Vantage Platform. Effectively money for nothing.

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