Sequence-of-Returns Risk in SIPP Drawdown: Why the Order of Market Falls Matters
How sequence-of-returns risk can permanently damage a SIPP in drawdown even if long-term average returns are fine, and practical ways to reduce it in 2026/27.
Quick answer
Two pensioners can experience the exact same average investment return over 20 years and end up with wildly different outcomes, purely because of when the good and bad years happened. If a large market fall lands in the first few years of drawdown, withdrawals are forced to sell a shrinking number of units at depressed prices, permanently reducing the capital base available to recover when markets rebound β this is sequence-of-returns risk, and it is one of the least understood risks in pension drawdown.
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SIPP calculatorWhy timing beats averages
During the accumulation phase β while still contributing and not withdrawing β the order of returns barely matters, because a fall is simply a temporary paper loss with time to recover. Drawdown flips this entirely: a fixed or percentage withdrawal taken during a downturn means selling more units to raise the same cash amount, permanently reducing the number of units left to benefit from the eventual recovery. Two portfolios with identical average annual returns can therefore produce very different real-world outcomes depending purely on whether the falls happened early or late in the drawdown period.
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A commonly used approach is the "bucket" strategy: keeping one to three years of anticipated income needs in cash or short-dated low-volatility assets, so that withdrawals during a market downturn come from the cash bucket rather than forcing the sale of growth assets at a loss. Another approach is flexible withdrawal β deliberately taking a lower income in the years immediately following a significant market fall, and topping back up once markets recover, rather than sticking rigidly to a fixed percentage or fixed cash amount regardless of market conditions.
uk-pension-drawdown-strategiesAnnuities as a sequence-risk-free option
Converting some or all of a pension pot into an annuity removes sequence risk entirely for that portion of retirement income, because the income is guaranteed regardless of what markets subsequently do. The trade-off is giving up further investment growth potential and, in most cases, access to the underlying capital β which is why a "hybrid" approach, annuitising a portion to cover essential spending while leaving the rest invested in drawdown, is a common middle-ground strategy.
Bottom line
Sequence-of-returns risk is the reason "average returns" can be a misleading way to plan retirement income β the practical response is to build in a buffer against being forced to sell at the worst possible moment, whether through cash reserves, flexible withdrawals, or partial annuitisation.
Sources
- Money and Pensions Service (MoneyHelper): Pension drawdown
- gov.uk: Tax on your private pension contributions
- Financial Conduct Authority: Retirement income advice
Frequently asked questions
What is sequence-of-returns risk?
It's the risk that the order in which investment returns happen matters, not just their long-term average β a market fall in the first few years of taking income from a pension pot does far more lasting damage than the same fall occurring many years later, because withdrawals are being made from a shrunken pot at the worst possible time.
Why does this matter more in drawdown than while still saving?
While contributions are still going in and nothing is being withdrawn, a market fall is just a paper loss that has time to recover. Once regular withdrawals start, selling units after a fall locks in losses permanently and leaves a smaller base to recover on, compounding the damage.
How can sequence risk be reduced in a SIPP?
Common approaches include holding one to three years of income needs in cash or lower-volatility assets to avoid selling growth assets during a downturn, reducing withdrawal rates flexibly in years after poor returns, and using a 'bucket' strategy that separates near-term income from long-term growth assets.
Does the order of returns matter for a pension left untouched?
Much less so. A pension that is still being contributed to, with no withdrawals, is far less exposed to sequence risk, because there is no requirement to sell assets at a specific point in time β the risk is specifically tied to the combination of withdrawals and volatility.
Is an annuity a way to avoid sequence risk entirely?
Yes β converting some or all of a pension pot into an annuity removes market and sequence risk from that portion of income, in exchange for giving up the potential for further investment growth and, in most cases, access to the underlying capital.
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