Drawdown - Why a central retirement process is required

Retirement can mark a fundamental change in your financial life. For decades, your focus may have been on building wealth (contributing to pensions, investing regularly and accumulating assets), however, when you retire, that will likely change. You are no longer building your assets, you are relying on them to provide income, potentially for the rest of your life.

Since the pension freedoms introduced by the UK Government in 2015, individuals with defined contribution pensions have been able to access their retirement savings with far greater flexibility with flexi-access drawdown allowing you to take up to 25% tax-free (subject to allowances), leaving the remaining funds invested to withdraw income as needed.

This flexibility has transformed retirement planning. However, it has also increased responsibility and risk to the individual. Without a clear structure, drawdown can expose you to significant financial uncertainty. That is why a Central Retirement Process (CRP) is now required before entering drawdown.

The Risks of Drawdown

Drawdown is not simply a withdrawal mechanism. It is a long-term income strategy that needs to withstand market volatility, inflation and increasing life expectancy. The key risks include:

Sequencing Risk
If markets fall early in retirement while you are withdrawing income, the combined effect of losses and withdrawals can permanently reduce your fund’s longevity. Early negative returns can have a disproportionate impact on long-term sustainability.

Longevity Risk
Many people underestimate how long retirement may last. A healthy 65-year-old could easily spend 25 to 30 years in retirement. Your pension must therefore potentially provide income for longer than you thought.

Inflation Risk
Over long periods, even moderate inflation erodes purchasing power. An income that feels comfortable today may not maintain the same lifestyle in 15 or 20 years.

Behavioural Risk
Emotional decision-making during periods of market volatility (such as reducing investment exposure after a downturn) can undermine long-term outcomes.

These risks do not mean drawdown is unsuitable. They mean it requires structure, co-ordination and ongoing oversight.

What Is a Central Retirement Process?

A Central Retirement Process (CRP) is a structured, repeatable framework for managing retirement income. It places retirement planning at the centre of financial decision-making and integrates every moving part into one cohesive strategy. Rather than viewing drawdown as a product, the CRP treats retirement as an ongoing financial process that includes

• Lifetime cashflow modelling
• Sustainable withdrawal analysis
• Investment strategy alignment
• Tax planning co-ordination
• Liquidity management
• Ongoing monitoring and review

It aims to ensure that income decisions, investment strategy and tax planning are aligned and regularly assessed.

Why a CRP Is Required When Entering Drawdown

Establishing Sustainable Income

One of the most important questions in retirement is: “How much can I withdraw without running out of money?”

There is no universal answer. A Central Retirement Process models your individual circumstances (expenditure needs, other income sources, life expectancy assumptions and investment return projections) to determine a sustainable withdrawal strategy.

It stress-tests the plan against adverse scenarios, including market downturns and higher inflation, reducing the risk of depleting funds prematurely.

Aligning Investments with Income Needs

In retirement, investments must support income. Growth remains important to combat inflation, but excessive volatility can increase sequencing risk.

A CRP ensures:

• Short-term income is supported by lower-volatility or liquid assets
• Medium-term needs are diversified appropriately
• Long-term growth assets remain in place

This structured approach aims to balance stability with growth potential.

Co-ordinating Tax Efficiency

Drawdown income beyond any tax-free entitlement is taxable. Without careful planning, retirees can unintentionally move into higher tax bands or create unnecessary liabilities.

A Central Retirement Process can co-ordinate withdrawals across pensions, ISAs and other assets to manage tax exposure efficiently. This might include:

• Phasing tax-free cash over several years
• Managing income within tax thresholds
• Planning withdrawals to reduce lifetime tax impact

Over a multi-decade retirement, consistent tax efficiency can materially improve outcomes.

Managing Change Through Ongoing Review

Retirement planning is not static. Investment markets fluctuate. Tax legislation evolves. Personal circumstances change.

A CRP provides a governance framework with scheduled reviews, portfolio rebalancing and withdrawal adjustments where necessary. This disciplined approach reduces emotional reactions and supports informed decision-making.

Providing Clarity and Confidence

Retirement should offer freedom, not financial anxiety. Without a structured plan, retirees may constantly question whether they are spending too much or too little.

A Central Retirement Process provides visibility over future income, clear contingency planning and defined decision-making principles. It replaces guesswork with clarity.

Providing Clarity and Confidence

Retirement should offer freedom, not financial anxiety. Without a structured plan, retirees may constantly question whether they are spending too much or too little.

A Central Retirement Process provides visibility over future income, clear contingency planning and defined decision-making principles. It replaces guesswork with clarity.

Drawdown Is a Strategy, Not a One-Off Decision

Entering drawdown is not simply selecting an option on a pension form. It is the beginning of a long-term income strategy that may need to last 30 years or more.

Flexibility is one of drawdown’s greatest strengths. However, flexibility without discipline increases risk. A Central Retirement Process provides the structure needed to manage that flexibility responsibly.

Essentially
Drawdown offers control, growth potential and estate planning advantages. But it also introduces sequencing, longevity, inflation and behavioural risks that must be managed carefully.

A Central Retirement Process ensures:

• Income sustainability
• Investment alignment with retirement objectives
• Integrated tax planning
• Ongoing monitoring and governance
• Greater financial confidence

Before entering drawdown, the priority should not simply be accessing funds, it should be establishing a robust Central Retirement Process to support your retirement for the long term. Drawdown is not suitable for everyone.

This article does not constitute financial advice, and you should always consider taking professional advice before making financial decisions. Indeed, it’s important to consider seeking professional advice to explore the best options for your needs. Your Dentons Adviser can help you work out the right option for your personal circumstances.