Drawdown risks and benefits

The impact of stock market falls in drawdown

While you’re building a pension, drastic falls in the value of your investments can be dealt with relatively comfortably. You’re likely to have many years for your portfolio to recover. And, if you feel the investments have good long-term potential, you could even choose to keep buying more at a lower price.

In drawdown the situation is different. If your investments suffer drastic falls and you find yourself in a situation where you need to sell investments so your income can be paid out, you may deplete your pot rapidly.

Financial markets experience years of above average growth and years of decline. This often goes hand-in-hand with how the economy is performing.

Whether you’re in a growth or decline period can make a huge difference to how long your drawdown pension will last.

Safety in cash?

You can leave your drawdown pension as cash if you wish. You won’t be subject to any falls in the stock market, but you won’t benefit from any rises either.

If you’re looking to withdraw all of your money over a short space of time (for example, less than five years), keeping it as cash could be a sensible strategy. But remember, when interest rates are lower than inflation, the buying power of the money in your pension will fall. For example, if inflation is 5% higher than your interest rate, it could halve your buying power in just 15 years.

If you plan to use drawdown for the long term, you might choose to invest your money in the hope of greater returns.

We feel it’s important to consider holding some cash in your drawdown plan, or enough cash savings outside of your pension, to act as a buffer to help protect you when markets fall.

More about investing in drawdown