In a nutshell
Drawdown is a flexible option that lets you control how much you withdraw and where you invest. It also offers the potential for growth, although investment returns aren’t guaranteed.
The flexibility of drawdown can be an advantage, but it also comes with more risks. Your income isn’t secure, and you could run out of money if your investments don’t perform as well as you might have hoped. It won’t be right for everyone, so it’s important you weigh up the risks and benefits.
The impact of stock market falls in drawdown
While you’re building a pension, drastic falls in the value of your investments can be dealt with relatively comfortably. You’re likely to have many years for your portfolio to recover. And, if you feel the investments have good long-term potential, you could even choose to keep buying more at a lower price.
In drawdown the situation is different. If your investments suffer drastic falls and you find yourself in a situation where you need to sell investments so your income can be paid out, you may deplete your pot rapidly.
Financial markets experience years of above average growth and years of decline. This often goes hand-in-hand with how the economy is performing.
Whether you’re in a growth or decline period can make a huge difference to how long your drawdown pension will last.
Safety in cash?
You can leave your drawdown pension as cash if you wish. You won’t be subject to any falls in the stock market, but you won’t benefit from any rises either.
If you’re looking to withdraw all of your money over a short space of time (for example, less than five years), keeping it as cash could be a sensible strategy. But remember, when interest rates are lower than inflation, the buying power of the money in your pension will fall. For example, if inflation is 5% higher than your interest rate, it could halve your buying power in just 15 years.
If you plan to use drawdown for the long term, you might choose to invest your money in the hope of greater returns.
We feel it’s important to consider holding some cash in your drawdown plan, or enough cash savings outside of your pension, to act as a buffer to help protect you when markets fall.
Do you have enough secure income?
It’s important not to rule out an annuity, which provides a guaranteed income for life. With drawdown, your income could go down as well as up, and you could even run out of money. So it won't be right for everyone.
Peace of mind could come from having enough secure income to cover your essential spending.
