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When to start thinking about pension drawdown?

Earlier than you might think! Knowing how a drawdown income is constructed is fundamental, and not just for those approaching the end of their career. Starting with the end in mind, allows you to work backwards from a target. It tells us the steps to be taken today, in order to enjoy the lifestyle you aspire towards in the future, for you and your family.

Pension drawdown is the name given to accessing ad hoc or regular income withdrawals from your pension. It offers ongoing control in the way you access your pension. With this flexibility comes risk, complexity, and opportunity.

Whatever your level of interest in pensions, understanding how all of your assets will support your retirement can be life changing. For most, pensions will form a corner stone of their retirement income.

Retirement income is an interplay between your various assets, be it pensions, ISAs, General Investment Accounts or property income. The balance being to achieve a tax efficient income which is sustainable throughout retirement, whilst of course allowing you to enjoy the hard earned fruits of your labour.

Whether you are years away from drawdown, or already there, the importance of a cash flow modelling exercise cannot be overstated. For those still working, it demonstrates the trajectory of your pensions and investments up until retirement. In drawdown, modelling your planned income withdrawals, and factoring tax, illustrates the longevity and resilience of your strategy. For those hoping to make gifts to family, or leave a legacy, knowing the shape your assets might take throughout retirement informs choice. Different growth rates, inflation assumptions, and even market shocks can be modelled, to test battle readiness.

As retirement moves within sight, connecting your investment strategy to your drawdown plan is vital. When investing we know there will be good years and difficult years. Unfortunately, we do not know and certainly cannot control, the order in which they arrive. In investment talk, this is known as sequential risk. Early in your career it is less important, and as a result market swings can feel more palatable – time tends to heal all wounds for well constructed portfolios.

As you approach drawdown, it is a different story. Losses early into retirement can be detrimental to the longevity of your retirement funds. Making sensible provisions in your drawdown strategy for this possibility is wise.

For most, their path will lead to drawdown. There is plenty to get to grips with, so probably best to start now!

Chris Bull FCSI, Chartered Financial Planner

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