Drawdown dilemmas: Five essential tips to share with clients

Quilter's Jon Greer shares his top five tips to share with drawdown clients currently experiencing an "incredibly punishing" time in the markets...

Investors have endured an “incredibly punishing month” during the global markets sell-off which has been especially troubling for drawdown clients, according to Quilter head of retirement policy Jon Greer.

He said global markets sold-off indiscriminately during the worsening coronavirus pandemic leaving troubling questions for people either in drawdown or approaching retirement – due to the potentially damaging impact on retirement income plans.

Here, he shares five tips to communicate to spooked drawdown investment clients which could help shape their standard of living and financial wellbeing in retirement.

  1. Stay invested

“The important thing is not to panic. In the years since the crisis investors have enjoyed bumper returns that have bolstered retirement pots. It means that despite the recent slump in capital markets, drawdown investors approach this from a position of strength.

 “Doing nothing may seem counterintuitive but investors can be their own worst enemy in times of strife. There can be a temptation when markets fall to flee into cash but while a portfolio may be worth less at today’s prices than it was just a few weeks ago, those losses aren’t locked-in until the assets are sold. If you stay invested then there is an opportunity for them to recover.”

  1. Consider reducing withdrawals

“Those with smaller pots will need to think carefully about how best to protect the longevity of their retirement savings. For instance, someone with a £100,000 pot might have set-up withdrawals of around 4%, or £4,000 per annum. But they now face a tough decision. If their pot has fallen in value to £75,000 then £4,000 represents a withdrawal rate of around 5.3% a year, which may not sound a lot but creates considerable uncertainty about how long their pot will last.

“To mitigate the risk of ruin, they could keep their withdrawal rate fixed at 4% to preserve the longevity of their pot, although this would see the income from their pension drop to £3,000 a year. This is a difficult decision and individuals need to decide whether they are willing to forego some income today in exchange for greater income security in the future.”

  1. Take income from dividends and other assets

“When you are in drawdown the sequence of your investment returns is of vital importance. In the scenario shown below, which shows a retiree with a portfolio of £100,000, taking annual withdrawals of £5,000, their portfolio could be 22% worse off if they experienced losses in the first two years of retirement, compared to having these same losses in years four and five.

Returns of a £100,000 portfolio over five years

Portfolio 1 Portfolio 2
Year Withdrawal Annual returns Annual portfolio value (£) Annual returns Annual portfolio value (£)
1 £5,000 25% £120,000 -25% £70,000
2 £5,000 15% £133,000 -15% £54,500
3 £5,000 0% £128,000 0% £49,500
4 £5,000 -15% £103,800 15% £51,925
5 £5,000 -25% £72,850 25% £59,906
22% difference


“This is due to a process knowing as ‘pound-cost ravaging’, where because of declining markets more investment units have to be sold to generate a desired income level, thus depleting the portfolio size during the early years of drawdown.

“One way to avoid this and allow your pot to recover is to take your income from the dividends and bond payments that your underlying investments will provide. While dividends and bond yields can fluctuate, this approach avoids the requirement to lock-in a fall in the market by selling units in order to generate an income. Additionally, as some companies suspend or scrap their dividends altogether, it is important investors mitigate some of this risk by having a diverse income stream, such as infrastructure investments, and do not rely solely on a few large dividend paying UK businesses.”

 “Another option is to utilise other assets in the medium term while markets recover, particularly something like a cash Isa. This might provide a form of compromise which allows individuals to pause or reduce their pension income withdrawals, thereby avoiding the need to compound losses in their pension. If you have cash savings or other assets you can afford to live off which haven’t been affected by the stock market fall then this might be the best option.”

  1. Top-up your pension

“Adding more to your pension pot could help to restore your income sustainability to its previous level. Indeed, some people will choose to invest now when asset prices are depressed in the hope that they can get a bargain. But of course this does mean finding money to add to your retirement savings, which won’t be possible for everyone.

“For those that go down this route it will be important to check your annual allowance. If you’ve already commenced flexi-access drawdown then you will be subject to a reduced ‘money purchase annual allowance’, capping the amount you can pay into your pension with tax relief.”

  1. Delay retirement

“If you are just beginning your retirement journey or you are not yet retired then it is worth thinking about prolonging your career. Many people choose to phase into retirement gradually, rather than seeing it as a cliff edge goodbye to work.

“Shaving a few years off your retirement date removes the immediate term worries about cashing in your investments to generate income during a dip in the market. By delaying retirement, investors may be able to side-step the sequence of return risk to some extent.”