Is Pension Flexible Access Drawdown High Risk or Low Risk?

To answer the question of whether pension flexible access drawdown is low risk or high risk we must first understand the two core retirement options:

Annuity (Conventional or Enhanced)

After taking any pension cash lump usually (usually up to 25% of the fund value), the balance of your pension fund is invested with a pension annuity provider, and they then give you a guaranteed income either for life or a fixed term.  There are many options including level of increasing annuity payments, spouse’s pension on death, limited guaranteed death income payments usually up to 5 or 10 years.  Once bought, your income is guaranteed, and you usually have no link to investment market growth or losses as your income is a secured income.

• Annuities are therefore considered a low-risk retirement option if secure, safe income is your priority.

• See Conventional Annuity Annuities and Enhanced Annuities  Enhanced Annuity

• Annuities and Death:  Unless there is a 5- or 10-year guarantee for annuity income payments or a spouse’s annuity built in, your annuity dies with you i.e., this is then a windfall for the annuity company.  Annuities are therefore considered higher risk if death benefits are your priority.

Flexible Access Drawdown

After taking any pension cash lump usually (usually up to 25% of the fund value), the balance of your pension fund remains invested in funds with your pension provider.  You can withdraw as much or as little from your pension fund for ‘income’ as you need either on a regular or ad hoc basis.  There are no guarantees as fund values can fall as well as rise and if you are looking for a secure, guaranteed income, flexible drawdown is not for you.  If you continue to draw out funds whilst investment performance is falling, you will be spending original capital and may eventually run out of money. 

Your pension funds can be invested in either lower, medium, or higher risk funds as you see fit, so you can make your flexible access fund less exposed to stock market volatility if you choose to.   That said, even a cash fund and bond funds fall in real value when inflation and interest rates are high.

• Given pension fund values fall as well as rise, flexible drawdown is not considered a low-risk retirement option, it is considered at be least a medium or higher risk retirement option if secure pension income is your priority.

• See History of Pension Drawdown Pension Drawdown

• Flexible Access Drawdown and Death:  If you die the remaining balance of your pension fund is payable to loved ones, currently tax free if you die before age 75 and if you die after age 75, taxable at the beneficiaries’ rates of income tax.  It is not like an annuity, where there is no fund on death paid to beneficiaries.  Flexible Access Drawdown is therefore considered a low-risk retirement option if death benefits are your priority.

In summary, flexible access drawdown is medium risk to high risk for income and capital needs but from a death benefits perspective, flexible access drawdown is usually a lower risk death benefit option when compared to annuities.

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