Important information: the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
When you’ve spent a lifetime saving into your pension, you want to make it last as long as you do. So, when it comes to taking an income from your pension, the ‘when’ becomes all important. That’s why you need to know about sequencing risk.
What is sequencing risk?
Investments like stocks and shares can rise in value but they can also fall. When markets are volatile, it’s hard to predict what happens next. So, the timing of when you sell matters. Why?
Well, when you sell during a downturn, you may get less for your money. But if you can sell later, when markets have recovered… you could get more. That’s sequencing risk in a nutshell. A share sold today could be worth much more – or less – tomorrow. If you sell at the wrong time, you may need to sell more investments to get the same income, which can eat into your pension faster.
This is particularly important for retirees who are drawing down their pensions. If poor market performance hits in the early years of retirement, there is an extra danger your savings could run out sooner than you expect.
What should you think about?
To enjoy a comfortable retirement, your pension needs to last. That means considering both how much you’ll need and how long you might live.
1. Life expectancy
As we’re all living longer, it can be challenging to predict how long you need your pension to last.
The image below looks at the life expectancy of people already aged 65. It shows that women live, on average to age 88, while men live to 85. But there's a one-in-four chance that women will live to 95 – men to 92. And a one-in-ten chance that women will live to 98 – men to 96.
It means a sizeable number of us will enjoy retirements that last 30 years or more. So, try to base your plans on sensible assumptions of life expectancy while factoring in other sources of potential income you may receive at a later stage of life, like the State Pension.
2. Cost of living
How much you take from your pension each year makes a big difference. Take too much and your pot may not last as long as you’d like.
For example, a £100,000 pension pot will run out much faster if you withdraw 8% each year compared with 4%. Even small differences in withdrawal rates can make a big impact over time.
See how long your retirement income might last with our pension drawdown calculator.
How can you manage sequencing risk?
Unfortunately, you can’t stop markets from falling. But what you can do is prepare for the worst.
Here are some strategies to help you:
- Keep some of your savings in cash – It's worth having a cash safety net for when markets are falling so that you can take an income from it. You can then top up this cash reserve from your investments when – or if – they recover. This may not totally protect you from losses, but it can help lessen the impact of a falling market on your pension.
- Hold investments that pay income – If the value of your investments fall, see if you can survive off the income produced naturally from your investments (such as your dividends or bond interest). It might not be as much as you'd like, but if you budget a little in the short term it might benefit you in the long run. Our navigator tool can help you find diversified income funds based on what’s important to you.
- Buy an annuity – If the thought of riding out the highs and lows of the markets with your pension doesn't sit comfortably, you might want to think about buying an annuity. An annuity pays you a guaranteed income for the rest of your life. Like any income you draw from your pension, it's potentially taxable. You don't have to put all your savings into an annuity. You could keep some money invested and buy an annuity with the rest to cover your day-to-day costs. To find out if an annuity is right for you, please see our Annuities page.
- Think about following the 4% rule – this is one of the most common strategies for handling sequencing risk and states that you never withdraw more than 4% of the value of your pot each year. Many experts see this as a reliable way to make your pension last. But it is just a rule of thumb and may not be appropriate for everyone. Read ‘The 4% rule: the basics’.
And finally, be flexible … to make your pension last in the long run, try to be as flexible as possible.
Where to get help
The government’s Pension Wise service offer free, impartial guidance to help you understand your options at retirement. Visit https://www.moneyhelper.org.uk/en or call 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products, though this will have a charge.
Read more from our series:
Important information: investors should note that the views expressed may no longer be current and may have already been acted upon. Please be aware that past performance is not a reliable guide indicator of future returns. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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