Pension decumulation and drawdown

Most people focus on the accumulation phase of retirement funding and give relatively little thought to exactly how they will deploy those carefully built-up monies once they have retired – and how they will invest them to ensure that they can sustain their desired standard of living for many years, and perhaps decades. Rising life expectancies have actually created the issue of “longevity risk” and many rightly fear outliving even substantial funds today.

Decumulation is as the name suggests the “other side” to the retirement savings mountain, when one is deploying those carefully husbanded funds. Drawdown is the process of drawing on pension funds to meet living expenditures and other financial commitments.

Since pension freedoms were introduced back in 2015, savers have had the freedom to use their funds in far more ways. Annuities are still a fairly popular choice but these aren’t as attractive as they once were, and now that savers are not obliged to purchase one there are a whole range of other options to explore. For many people, this will call for an investment strategy which will allow for a maximum level of drawdown from a pension nest egg, which still allows for investment returns to be maximised and a portfolio to remain balanced.

A key point is that your investment strategy can and should change significantly over the years, and probably quite dramatically between the accumulation and decumulation phases of your pension planning. For instance, when you are younger and have more time to recover from losses and are building up your wealth then your portfolio might contain riskier assets like equities in greater proportions; then, when you are no longer adding to your pot, then a more cautious, income-focused strategy might be more appropriate.

The decumulation and drawdown elements of retirement planning are incredibly important, but often neglected. They also need to be looked at in the round, taking into account all your other financial affairs – particularly tax exposures. If you are married, you might also want to look at the asset allocations of both partners’ portfolios to make sure that concentration risk hasn’t become an issue (where lots of holdings are replicated).