The same average return can produce two completely different retirements. The difference is timing, specifically what markets do in the first few years after you start drawing on your pension.
That’s sequencing risk. It’s less famous than market risk, but for retirees it’s arguably the more dangerous of the two. It’s sometimes called the “silent threat” to retirement plans, and the label is a fair one.
Why timing beats averages
While you’re still contributing, falling markets are a feature. Each payment buys more units at lower prices, and time does the rest.
Withdrawals flip the maths.
Take £20,000 a year from a £500,000 pot in a calm year and you’ve taken 4%. Take the same £20,000 after a 30% crash and you’ve taken closer to 6% of what’s left, and you’ve sold the units that would have recovered.
Do that for a few years in a row at the start of retirement and the pot may never get back to where it was, even if long-run average returns end up looking perfectly respectable on paper.
Put plainly: poor investment returns early in retirement, combined with withdrawals, can harm the sustainability of a pension in a way that strong returns later can’t fully repair.
The fragile window
The first 5 to 10 years of retirement carry the most sequencing risk. After that, the impact of any single bad year shrinks, partly because the pot is smaller, partly because there’s been time to ride out the worst of it.
Mainstream modelling of UK retirement drawdown strategies makes the same point in a different way. A rigid “pound-plus-inflation” approach (take a set figure and increase it with inflation every year) is not always successful in lasting the full 30 years.
A dynamic approach, where withdrawals flex up in good years and down in bad ones, raises that success rate into the mid-70s. Same pot, same returns, very different odds, purely because of how withdrawals were structured.
Handle the early years well and the rest of the plan tends to look after itself.
Why it’s also a behavioural risk
Sequencing risk isn’t only about the maths. The first big drawdown drop is often when investors abandon the plan: switching to cash, cutting equities, locking in losses.
The outcome is mostly written for the rest of retirement at that point, regardless of what markets eventually do. Knowing the risk is partly emotional makes it easier to plan around.
How a SIPP helps
Annuities lock in a number. A SIPP keeps your options open, which is exactly what sequencing risk asks for.
- Flex your withdrawals. In a bad year, take less. In a good year, take a bit more. You’re not stuck with a fixed schedule.
- Hold a buffer. Keeping 1 to 3 years of expected income in cash or short-dated bonds means you don’t have to sell equities at the bottom of a drop. Most mainstream retirement research flags a cash buffer as one of the single most effective protections available.
- Use the 25% tax-free lump sum on purpose. It doesn’t have to come out on day one. Saving some for a rough patch can take pressure off the rest of the pot when it’s needed most.
- Layer in defensive holdings. A modest allocation to short-dated gilts, money market funds or multi-asset funds can dampen the worst of a bad sequence without giving up all the growth potential.
- Keep the long money working. Cash you don’t need for the next five years can stay invested. That’s the part of the pot doing the heavy lifting for years 15, 20 and 25.
- Consider a phased approach. Crystallising in tranches (rather than all at once) can spread sequencing risk and tax over multiple years, which is a flexibility annuities don’t offer.
In short
Sequencing risk is the reason “average return” is a misleading number for retirees.
A SIPP can offer you the controls you might need. These controls, when used well, can help to make sure the order of returns doesn’t end up writing your retirement plan for you.
Important information
Capital at risk. The value of your investments can go down as well as up, and you may get back less than you put in.
Tax treatment depends on individual circumstances and is subject to change. ETF costs also apply.
This content is for information only and is not financial advice. If in doubt you may wish to consult a professional adviser for guidance.