Before You Use Pension Drawdown: Sustainability Risk and Sequencing

What pension drawdown is

Flexi-access drawdown allows pension savers to keep their pension fund invested and draw income flexibly from age 55 (57 from 2028). Unlike an annuity, there is no guaranteed income and no minimum withdrawal requirement. The fund remains invested in the market and withdrawals reduce the pot. If withdrawals exceed investment returns over time, the pot will eventually be exhausted.

The risks most people do not check

Sequencing risk is the most underestimated drawdown risk. If poor investment returns occur in the early years of drawdown while withdrawals are being made, the portfolio is permanently impaired even if markets subsequently recover. A 30 percent market fall in year two of drawdown has a far worse long-term effect than the same fall in year ten, because the reduced pot is then depleted further by ongoing withdrawals before recovery.

Drawdown income is not guaranteed. Unlike an annuity, there is no contractual income. The income available depends on the performance of the invested portfolio and the withdrawal rate chosen. Withdrawing too much relative to portfolio returns leads to fund depletion.

The 4% rule is a US heuristic, not a UK guarantee. The commonly cited 4 percent sustainable withdrawal rate was derived from US market data over specific historical periods. UK market conditions, charges, tax and individual circumstances mean this figure cannot be reliably applied without personalised financial planning.

Investment charges compound over decades. Platform charges and fund charges on drawdown portfolios compound significantly over a 20 to 30 year retirement. A 0.5 percent difference in annual charges on a £300,000 portfolio costs approximately £75,000 over 25 years in lost returns.

What to verify before entering drawdown

Model the withdrawal rate against realistic investment return assumptions and life expectancy projections. Assess whether a partial annuity purchase to guarantee core income needs would reduce sequencing risk. Compare platform and fund charges across providers. Obtain regulated financial advice before committing to a drawdown strategy.

Where to complain

Unsuitable drawdown advice goes to the Financial Ombudsman Service. Platform or fund charge disputes can also be raised with the FOS.

Frequently asked questions

What is sequencing risk in drawdown?

Sequencing risk is the danger that poor investment returns in the early years of drawdown permanently damage the portfolio. When withdrawals are taken from a falling portfolio, more units are sold to fund income, leaving fewer units to benefit from subsequent recovery. The order of returns matters, not just the average.

How much can I withdraw from drawdown each year?

There is no minimum or maximum withdrawal from flexi-access drawdown. However, withdrawals trigger the Money Purchase Annual Allowance of £10,000 per year for future pension contributions once you begin to access flexible income.

What is the Money Purchase Annual Allowance?

Once you access flexible pension income through drawdown, your annual allowance for future pension contributions is reduced from £60,000 to £10,000. This limits the ability to continue building pension savings while in drawdown.

Should I buy an annuity instead of using drawdown?

An annuity provides guaranteed income for life regardless of investment performance, eliminating sequencing and longevity risk. Drawdown offers flexibility and potential for higher income if investments perform well. A combination of both is appropriate for many retirees, using an annuity to cover essential spending and drawdown for discretionary income.

What happens to my drawdown fund when I die?

Drawdown funds can typically be passed to beneficiaries on death. If death occurs before age 75, benefits are usually paid tax-free. After 75, benefits are taxed as income for the recipient. Drawdown funds are generally outside the estate for inheritance tax purposes.