Investment Jargon: ​Drawdown on a Pension

​Drawdown on a Pension

When you retire and start to take money out of your pension savings the rate at which you do so is called the drawdown rate. The best drawdown rate is difficult to judge, and rather morbid to calculate,​ because you have to estimate how long you will survive. For example if you have £1 million in your savings, retire at 65 and expect to live another 25 years to the age of 90, then if you withdraw 4% each year that will give you £40,000 each year. A rough rule of thumb is therefore that you can withdraw 4% of your money each year. If you are lucky the pot will grow in line with inflation as you draw down, if you are unlucky it won’t.

This simple 4%-per-year approach may run into problems and could leave you with no money before you die if your investments suffer during a market crash or if you live longer than expected or if inflation spikes due to economic mismanagement by the government. That’s why it is best to draw down only what you need, and if that is below 4% so much the better.