Converting your pension savings to a retirement income:

In March 2014, new ‘Pensions Freedom’ legislation was introduced which removed most of the restrictions on how people draw an income from their pensions and introduced greater levels of flexibility.

Individuals are now able to take as much as they wish from their pension any time after their 55th birthday.

Start planning now!

To talk to one of our expert retirement planners today and arrange a free, no-obligation initial meeting, please contact our office on:

0115 981 95 29

[email protected]

What happened next?

Before the pensions freedom rules were announced, in the period of April – December 2013 there were £8.6bn of annuity sales.

After the pensions freedom rules were announced, in the period of April – December 2015 there were just £3.3bn of annuity sales – a drop of 62%!

In 2016 the trend continued and in the period of April to June there was an eye-watering £1.8bn of pension withdrawals – more than in any other single quarter since freedoms were introduced.


Income drawdown offers greater flexibility than an annuity. However, it also increases the likelihood that individuals won’t be able to maintain their income throughout their lifetime which only exaggerates the need for expert financial planning advice. Below we detail some of the further risks individuals in pension drawdown face…

Life expectancy

Here are some interesting statistics which may surprise you…

  • A male retiring in 2021 at age 65 is expected to live to age 87, whereas a woman retiring in 2021 at 65 is expected to live to 89.
  • 1 in 4 people over the age of 65 will enter residential care.
  • 58% of 65 to 74 year olds reported a long-standing illness or disability in the UK in an ONS survey in 2013.

These statistics lead to one important warning: Your retirement savings may need to go further than you’ve ever anticipated, so careful planning and professional advice is essential.

Sequence of returns

‘Sequence of returns risk’ describes the effect of the order in which investment returns are delivered during pension income drawdown.

Research shows that poor returns in the early years of drawdown can significantly affect an investor’s experience. The likelihood that an investor will need to reduce their income levels in future years is increased. Even worse, it means you are more likely to run out of money before you run out of breath!

For example:

The examples below show portfolios of £100,000 with average returns of 7% p.a over a period of 25 years – from age 60 to 85.

Example No 1 and 2 graphs

Previously, legislation was in place to help maintain a certain level of income through retirement. For example, by restricting the amount of income that could be withdrawn in a ‘Capped Drawdown’ arrangement. These restrictions have now been removed and it is now more vital than ever to ensure that a sufficient and stable rate of capital growth is maintained to sustain your income throughout your whole retirement.

Reverse pound cost averaging

Reverse pound cost averaging is the effect of withdrawing a fixed regular income from a volatile asset. As the value of the asset falls, more units or shares have to be sold to maintain the same level of income. By selling more units, the fund has less chance to recover.

Let’s take a look…

The examples below show the performance from two funds which have the same total return over the period. However, fund B is more volatile than fund A. Therefore, more units of fund B need to be sold to maintain the same level of income.

Fund A and Fund B graphs

Potential solutions

Income drawdown is an inherently riskier strategy in retirement than an annuity. However, there are ways to help mitigate these risks and improve the chances of maintaining a ‘sustainable withdrawal rate’.

These can be split into an individual’s approach to income and some possible considerations when investing:

Approach to income

Understand the ‘maximum sustainable withdrawal rate’ – For the UK, there are various pieces of published research which suggest various different ‘sustainable withdrawal rates’ (SWR). Our policy is to adopt a maximum SWR of between 3.75% – 4% for our clients in drawdown, which we feel will not risk depleting the pension pot over a period of up to 30 years and will mean you don’t run out of money before you run out of breath!

Adapt your withdrawals – After periods of poor performance, try to limit withdrawals in order to help preserve the fund. Conversely, after periods of good performance – such as those seen in 2016 – you may wish to take profits ‘off the table’ and take an additional withdrawal to put towards any capital expenditure. Working with a Financial Planner will help you achieve this goal.

Annuitisation – Whilst Annuity rates are currently at all-time lows they may still be appropriate for some individuals. Even annuitising just part of your pension pot may be required to provide some guaranteed income. This is what we refer to as a ‘blended solution’.

Considerations when investing

Hold sufficient funds in cash – We would normally suggest holding 2 years’ worth of income in cash to fund your short-term income needs, whilst investing the remaining funds with the aim of achieving capital growth. This can reduce the risk of reverse pound cost averaging and is sometimes known as a ‘bucketing strategy’.

Consider starting with a lower % of equities – Independent research suggests starting with a lower % of equities (c.40%) and drawing an income from non-equity assets in the earlier years of retirement. This can reduce the impact of sequence of returns risk. However, this approach would be dependent on an individual’s attitude to risk and personal circumstances.

Adapt your equity exposure to meet your desired withdrawal rate – US research indicates that for higher withdrawal rates, a substantial exposure to equities tends to produce higher probabilities of success, albeit with higher volatility. If the target withdrawal rate was lower than 3.5%, then an asset allocation containing at least 40% equities was 100% successful over a 30-year period.

At a withdrawal rate of 4%, an equity allocation of around 60% was 100% successful over a 30-year period.

Diversify – Portfolios exposed to global assets enhance diversification, reduce country specific risks and can improve returns. Diversification can take many forms; we believe in true diversification which means holding negatively correlated assets which perform differently in different market conditions. This should hopefully allow for a ‘smoothed’ growth rate over the long term via a multi-asset approach.

The above is a lot of information to take in and we can’t hide away from the fact that getting your drawdown strategy correct from the beginning is life-changing – get it wrong and you could run out of money much sooner than you expected!

This is why our team of Pension Transfer Specialists take the time to discuss our clients’ retirement needs and circumstances, attitude to investment risk and income requirements. The process can take a little time and we may, depending on your circumstances, advise that transferring your benefits is not in your best interests.

However, getting the correct retirement strategy in place at the outset could be the difference between enjoying a comfortable retirement and doing those things you’ve always wanted to do or facing a poor retirement outcome – something we are committed to avoiding for all of our clients.

To talk to one of our expert retirement planners today and arrange a free, no-obligation initial meeting, please contact our office on 0115 981 95 29
or e-mail us at: [email protected]