Sequencing Risk – why timing matters in retirement

Sequencing risk refers to the order in which your pension’s investment returns occur, especially during the early years of retirement. If you experience a drop just as you begin drawing income, your pension pot may shrink faster than expected – making it harder for your money to recover, even if your investments improve later. 

If you use your pension to buy a guaranteed income for life (pension annuity), sequencing risk won’t affect you. This is because you receive a regular income regardless of market performance – your money’s committed, and isn’t exposed to volatility. 

However, if you set up a flexible income (pension drawdown), sequencing risk could affect you. Visit our dedicated page to find out more about the different ways you can access your pension.

Let’s say two people – Alex and Lisa – each retire with £500,000 in their pension pot and experience the same average investment returns over five years.

• Alex’s pension investments drop 15% in the first year, at the same time as he begins withdrawing income. This combination of early poor returns and withdrawals means Alex’s pot shrinks significantly, making it harder to recover – even when his investments pick up again later.
• Lisa, on the other hand, sees strong returns in the first few years. With a growing pot and withdrawals having less impact, Lisa’s retirement income stretches further and remains more stable, even when her investments drop later.

That’s the power – and risk – of timing. This isn't a real life example.

There’s no 100% fail-proof solution to tackling sequencing risk, but there are a few measures you can take which could minimise its impact:

• Delay retirement
  This could give your investments breathing space to recover if they suffer a period of bad performance. There’s no promise of this, though– they could continue to perform badly.

• Diversify your investments
  Don’t put all your eggs in one basket, a mix of stocks and shares, bonds, and other types of investment can help spread risk. This means if one type of investment performs badly, but the others don't, it won't hit you as hard.

• Be flexible with your withdrawals
  If you can afford to, withdrawing a lower income during periods of poor performance can help better preserve your investments.

• Build a buffer
  Keeping an amount of money as cash or in low-risk investments gives you other options to turn to if your riskier investments start performing badly.