Recent falls in investment markets highlight the need to consider a retirement income that’s both guaranteed and flexible

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The curtain has just come down on this year’s Edinburgh Festival and over 50,000 performances were given in more than 300 venues across the city. I didn’t go to many shows but I did manage to see a few comedy gigs and it’s true what they say; timing is everything.

Timing is also a crucial factor when it comes to taking a drawdown income in retirement, because market falls – especially if they occur early in retirement, when your savings are at their peak – can mean they won’t last as long as you expected. This means you may need to reduce your monthly income, and for some it can mean that savings run out too soon.

Recent changes in the rules around how people can take a retirement income mean more people are likely to take advantage of the flexibility offered by drawdown, and will therefore stay invested in retirement. But the recent market volatility – which saw the FTSE 100 Index fall a startling 15%* in just under five months before it started to recover – highlights just how big an impact market falls can have on retired investors.

Freedom of choice

The introduction of pension freedoms earlier this year has created more choice over when you take money out of your pension and how you decide to generate an income from it.

Instead of getting locked into an annuity, more retirees are now turning to flexible drawdown arrangements that let them keep their money invested and give them the freedom to decide how much they want to take out of their pension pot each year. With drawdown, investors can also change their plans at any time depending on their evolving circumstances.

With more retirees staying invested, it’s important that they understand how market volatility can impact their income at different stages in retirement.

Weighing up risk and reward

With flexibility comes risk. How long will you live for and how much should you take out of your pension pot annually? What assets should you hold? What return will your investments make, and what happens if your investments fall – especially early in retirement?

The Chinese stock market crash over the summer reverberated around the world, and underlines the ever-present risk of market volatility. Given the uncertain nature of investment markets it’s important for pension savers to understand the impact this can have on the size of their pension pot and its ability to generate a retirement income.

If you enter into a flexible drawdown arrangement, a major downturn in the early years of your retirement is incredibly difficult to recover from because you’re withdrawing an income from your capital and diminishing it further.

Unless markets bounce back quickly and dramatically then your depleted pension pot will not be able to generate as much income for as long as you’d initially thought, potentially leaving you with a financial shortfall on your hands.

The example in the graph below shows that a retiree investing £100,000 in flexible drawdown on 6 April, when the new flexibilities became widely available, may now find their savings last three years less than they expected. It’s important, therefore, to consider taking steps to safeguard your retirement income and how long it will last.

Guaranteed drawdown offers a third option

So on one hand there are annuities that are inflexible but offer income certainty. Then there’s flexible drawdown that’s as flexible as its name suggests, but provides little certainty due to the nature of markets. But there’s a third option that offers a compromise.

If you decide on a guaranteed drawdown arrangement it’s possible to safeguard a level of income but also to stay invested and retain access to the capital in your savings pot should you need it.

If the value of your investment falls to nothing then you’ll still receive the guaranteed level of income you agreed for life. This arrangement protects you from the worst effects of a significant downturn on your retirement income.    

In the US this type of product dominates the income retirement market and it’s likely to become very popular in the UK as well. If you’re looking for flexibility and a level of guaranteed income then it should certainly be on your radar.

*Source: Bloomberg, 7 April to 24 August 2015.


Someone who moved their pension pot into flexi-access drawdown on 6 April and invested in a multi-asset portfolio may well have seen the value of their pot decline by around 6% in the last five months.

If the retiree began with savings of £100,000, and annual withdrawals of £5,500, and the value their investment didn’t recover, their savings would be exhausted three years earlier than expected.  

That retiree would need to reduce their subsequent income by £300 a year, or 5%, to compensate for the impact of this market fall early in retirement.

Illustrative image of market volatility graph

Source: Aegon, based on a 65-year-old retiree taking £5,500 a year income via monthly payments and investing in the ABI Mixed Investment 40%-85% Shares sector average between 7 April and 2 September 2015. Figures assume charges of 0.55% and 4% typical growth before charges.

Photograph of blog author Nick Dixon, Investment Director

Nick Dixon

Investment Director