Drawdown gives the opportunity for an increasing income that many investors look for in retirement. Stock market volatility after political events not uncommon, but it is something to bear in mind if you opt for drawdown. Investments rise and fall in value; this volatility makes drawdown a higher risk option than an annuity, which provides a secure income for life. Your income could reduce, or even run out, if investments don’t perform as you hoped, you take too much out or you live longer than expected. It needs regular management to make sure you are on track to meet your aims.
1. Think about your goals for the drawdown plan
The flexibility it provides means a wide range of investors with different aims have taken advantage of drawdown. Some investors don’t plan to draw any income, others want to draw a sustainable income throughout their retirement while some are happy to make large withdrawals which deplete the fund quickly.
It’s important to think carefully about what you want from your drawdown plan. This is likely to heavily influence where you invest and how much you withdraw.
2. Review your withdrawal strategy
Withdrawing income makes managing a drawdown plan more complicated than managing a pension before retirement. This is because deciding how much to withdraw and when to make the withdrawal is often not easy. Excessive withdrawals will deplete your fund so getting your strategy right is very important.
Selling investments to fund withdrawals while markets are falling will make it harder for your fund to recover from any losses. If you are worried about whether it is the right time to sell investments you could consider delaying the withdrawal or making a smaller withdrawal.
One approach to mitigate the risks of drawdown is to only withdraw the income your investments produce. This is known as drawing the natural yield. By taking this approach you could help preserve the value of your plan because your portfolio has more chance to grow when the stock markets hopefully recover. You still need to remember the income your investments produce is not guaranteed, it could increase, reduce or even stop for a period.
3. Consider keeping a cash buffer
This could help you continue taking the income you need without having to sell investments when markets are down.
If you don’t have a cash buffer now, it might be worth building one up over a period of time. This could be done by keeping some of the income your investments produce as cash or by selling investments when you feel their value is high. You might also choose to keep a buffer of cash savings outside of your pension (perhaps by saving some of the tax-free cash you received when you entered drawdown).
We suggest any drawdown investor should consider holding at least two years’ worth of planned income as cash. The amount you need to hold will depend on your circumstances, for example whether you have other sources of income to fall back on.
4. Review your investments
Volatility in the markets can create buying opportunities but it can also mean the value of your investments can fall rapidly if the markets turn against you.
The investments within your drawdown plan will fluctuate in value. It’s easy to log in to your drawdown account to view your investments and make a trade. A portfolio with a diverse range of investments is likely to be better sheltered during market falls and provide more consistent performance.
If you are looking to buy or sell investments you might want to consider doing this in stages to spread the risk.
5. Get help when you need it
What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances. You should take appropriate advice or guidance if you are at all unsure.
This article is not personal advice. We offer a range of information to help you plan your own finances and personal advice if requested. Our financial advisers can provide one-off advice as well as ongoing management of your drawdown plan.