Drawdown: flexible, but you carry the risk
Since the UK's 2015 pension freedoms, most people reaching retirement with a defined-contribution pension can leave it invested and draw an income directly from it — flexi-access drawdown — rather than buying an annuity. It's popular for good reasons: you keep control of your money, it stays invested with the potential to grow, and anything left can usually be passed on to your family.
The trade-off is that you shoulder two risks the annuity would have removed: the risk that your investments perform badly, and the risk that you live longer than your money lasts. Sequence-of-returns risk sits at the intersection of the two, and it's why drawdown needs testing, not just an optimistic average.
Why the order of returns matters when you're withdrawing
While you're saving, the order of returns doesn't much matter — a crash early on is actually helpful, because you're buying cheap. Once you start withdrawing, everything flips. Now a crash early on is dangerous, because you're selling to fund your income at exactly the wrong time.
Picture two retirees who both average 5% a year over their retirement. One hits a bad patch in years one to three; the other hits the same bad patch in their final years. Same average, same withdrawals — but the first retiree sells a big chunk of their pot at depressed prices right at the start, and those units are gone before the recovery arrives. The second retiree enjoys good early years that grow the pot before the bad years bite. The first can run out of money; the second can die with a surplus. Nothing separates them but timing.
Illustrative — same average return, different order
| Starting pot | £300,000 |
| Withdrawal | £15,000/yr (inflation-linked) |
| Bad returns in early years | Pot may run dry |
| Same returns, good years first | Pot may still grow |
The drawdown simulator makes this concrete: it runs your pot and withdrawals against real historical return sequences, so you can see the difference between a lucky start and an unlucky one rather than relying on a single average.
Safe withdrawal rates — and why the 4% rule needs care
A safe withdrawal rate is the amount you can take in year one — then increase each year with inflation — with a high probability the money lasts. The famous 4% rule (take 4% of the pot in year one, index it thereafter) came from US historical data and is a useful anchor, but it is not a UK guarantee. Several things argue for caution here:
- Fees. Platform and fund charges reduce your real return, and the classic studies didn't fully account for modern UK fee levels.
- Longevity. A healthy 60-something couple should plan for one of them potentially reaching their mid-90s — a 30-year-plus horizon.
- Different market history. UK and global returns aren't identical to the US series the rule was built on.
For those reasons many UK planners treat something closer to 3.5% as more prudent, and — crucially — treat any fixed rate as a starting point to be adjusted, not a set-and-forget rule. A pot of £400,000 at 3.5% supports about £14,000 in the first year; at 4% it's £16,000. The gap looks small but compounds over decades, especially if the early years go badly.
How to defend against sequence risk
You can't control the markets, but you can build a plan that survives a bad start. The main defences:
- Hold a cash buffer. Keeping one to three years of spending in cash or very low-risk assets means that when markets fall, you draw from cash instead of selling investments at a loss — giving your portfolio time to recover.
- Stay flexible. Trimming withdrawals in bad years — skipping the inflation increase, or cutting back on discretionary spending — dramatically improves how long a pot lasts. Rigid, rising withdrawals are what break plans.
- Don't over-de-risk. Going fully into cash removes growth you'll likely need over a 30-year retirement. Most drawdown plans keep a meaningful slice in growth assets for the long haul.
- Leave a margin. Retiring on the very tightest sustainable number leaves no room for a bad sequence. A little slack is the cheapest insurance there is.
- Use guaranteed income for essentials. Covering your non-negotiable bills with the State Pension and/or an annuity means market falls only ever hit your discretionary spending, not your survival.
Drawdown or annuity — or both?
An annuity converts your pot into a guaranteed income for life. It removes sequence risk and longevity risk entirely — the insurer carries them — but you give up flexibility, growth potential and, usually, the ability to pass the money on. Drawdown keeps all of those upsides but hands you the risks. Neither is universally right.
A popular middle path is to blend them: use the State Pension plus a modest annuity to guarantee your essential spending, and use drawdown for everything above that. That way a bad market sequence can dent your holidays and extras, but never your ability to keep the lights on. Whichever route you're weighing, model it first — the drawdown simulator shows how different withdrawal rates and start dates play out, and for the guaranteed-income side it's worth getting regulated advice, which is genuinely valuable at retirement.