Asset Allocation in Pension Drawdown: Building a Portfolio That Lasts

Building a pension fund during the accumulation phase is, in many ways, the simpler half of the problem. You contribute what you can, invest in a diversified portfolio, and let time and compounding do the work. Mistakes are recoverable: a bad year in your 40s is corrected by the subsequent decade of returns.

In drawdown, the stakes are different. You are simultaneously withdrawing from the portfolio and relying on it to grow. A significant market fall in the early years of retirement, combined with ongoing withdrawals, can permanently impair the fund — even if markets subsequently recover strongly. And unlike in accumulation, there is no steady stream of contributions to take advantage of low prices.

This guide sets out how to think about asset allocation for a pension in drawdown, including the transition from accumulation, the key asset classes available, and the particular considerations for internationally mobile and high-net-worth retirees.

The Accumulation-to-Drawdown Transition

The conventional approach to managing investment risk through a working lifetime is "lifestyling" — automatically reducing equity exposure and increasing bonds and cash as retirement approaches. A typical lifestyle strategy might be 80-90% equities in the 30s and 40s, gliding down to 40-60% equities in the final five years before retirement, and reaching 20-30% equities by the retirement date.

This de-risking was designed for an era when most retirees converted their entire pension pot to an annuity at retirement. The bond-heavy portfolio at retirement closely matched the characteristics of the annuity being purchased.

For drawdown investors, the lifestyle approach creates a problem. De-risking into bonds in the years before retirement reduces the portfolio's long-term growth capacity precisely at the time when long-term growth is still needed. A retiree at 65 with a 25-30 year investment horizon needs equities to maintain purchasing power over that period. Moving to 80% bonds at retirement is almost certainly too conservative for a healthy person expecting a long retirement.

The revised approach for drawdown retirees is a more moderate de-risking: enough defensive assets (cash, short-duration bonds) to fund 2-3 years of income without selling equities, and a longer-term portfolio maintaining meaningful equity exposure for growth.

The Core Asset Classes

Global equities. The engine of long-term real returns. Over any 15-20 year period, a globally diversified equity portfolio has historically provided positive real returns. In drawdown, equities are the "growth bucket" — held for the long term and not relied upon for immediate income.

A globally diversified equity allocation might include: UK equities (20-25%), North American equities (30-35%), European equities (15%), Asia-Pacific equities (15%), and emerging markets (10-15%). Passive index funds or ETFs are typically the most cost-efficient route to this exposure, with equity fund OCFs available from under 0.10% for broad market ETFs.

Fixed income (bonds). Bonds provide stability and income. Government bonds (gilts) have low default risk but are sensitive to interest rates; corporate bonds offer higher yields but carry credit risk. In 2026, with gilt yields at 4-5%, investment-grade bonds offer genuinely useful income that was absent in the low-yield environment of 2010-2022.

In drawdown, bonds serve two purposes: portfolio stabilisation (they typically fall less than equities in a bear market) and income generation to fund withdrawals without selling equities.

Cash. For immediate income needs and as a buffer against market falls. A drawdown portfolio should hold 1-2 years of income requirements in cash or near-cash equivalents, so that short-term withdrawals do not require selling equities at depressed prices.

Property. Commercial property (via REITs or property funds) adds a degree of inflation-linkage and diversification from equities and bonds. Direct commercial property in a SIPP can anchor part of the portfolio but is illiquid.

Alternative assets. Infrastructure funds, commodities, and absolute return strategies can add diversification. Their inclusion in a drawdown portfolio depends on complexity tolerance and the overall portfolio size.

Risk Profiling in Drawdown

Standard risk profiling questionnaires were designed for accumulation portfolios, where "risk" broadly means the volatility of returns over the accumulation period. In drawdown, the relevant risks are different:

• Sequencing risk: a run of poor early returns permanently depletes the fund
• Longevity risk: living longer than the portfolio lasts
• Inflation risk: portfolio growth does not keep pace with the rising cost of living
• Currency risk: for overseas residents drawing sterling income, exchange rate movements affect purchasing power

A retiree who scores "medium risk" on a standard questionnaire may need a higher equity allocation than the questionnaire suggests, simply because a conservative (low-equity) portfolio may not sustain 30 years of real income. The adviser's role is to model the implications of different allocations across different return scenarios, not simply to implement the questionnaire output.

Equity Allocation in Later Retirement

A common pattern in drawdown portfolios is to reduce equity exposure progressively as the retiree ages. This reflects the changing time horizon: at 65, a 30-year equity view is reasonable; at 80, a 15-year view is more relevant; at 85, an equity bear market has limited time to recover.

A rough "age-based" allocation guide:

• Age 60-70: 50-70% equities, 20-30% bonds, 10-20% cash/alternatives
• Age 70-80: 40-55% equities, 30-40% bonds, 10-15% cash
• Age 80+: 25-40% equities, 40-50% bonds, 15-20% cash

These are indicative only and depend heavily on income needs, health, estate planning goals, and other assets. A healthy 80-year-old with substantial other income (State Pension, DB pension, property income) and modest drawdown requirements can afford to remain invested in equities for longer than one entirely dependent on the drawdown fund.

The Internationally Mobile Dimension

For UK expats holding a UK SIPP or drawdown pension from overseas, the asset allocation must consider currency exposure. A pension invested in UK gilts and UK equities generates sterling-denominated returns. If the retiree is spending in UAE dirhams, Thai baht, or euros, currency movements affect real income.

Strategies for managing currency risk in a UK pension drawdown:

• Hedge sterling currency exposure within the portfolio using currency-hedged fund versions (most major fund providers offer currency-hedged share classes)
• Hold some non-sterling denominated assets — global equity funds naturally include non-sterling exposure, which partially offsets sterling depreciation
• Hold a cash buffer in the spending currency — convert sterling withdrawals to local currency during periods of relative sterling strength, building a local currency reserve

For those drawing significant income from UK pensions while living overseas, a QROPS may offer a more natural currency match — particularly in jurisdictions where the QROPS can hold local-currency assets and pay income in the local currency.

Charges and Their Impact

The total expense ratio (TER) or ongoing charge figure (OCF) of the underlying investments, combined with the SIPP platform charge, has a material impact on the sustainability of a drawdown portfolio.

At 1.5% total annual charge, a £500,000 portfolio pays £7,500 per year in charges. Over 20 years, assuming 6% gross return, this costs approximately £80,000 more than a 0.5% all-in charge portfolio — money that could have funded several years of additional withdrawals or passed to beneficiaries.

For drawdown portfolios, minimising costs is not merely desirable — it is a significant determinant of how long the portfolio lasts. Passive funds and low-cost SIPP platforms consistently outperform their higher-cost equivalents in the long run, after charges.

Rebalancing the Drawdown Portfolio

A drawdown portfolio drifts from its target allocation as different asset classes perform differently over time. Equities outperform in a bull market, leaving the portfolio overweight equities and underweight bonds. Rebalancing — selling some equities and buying bonds — restores the target allocation.

In drawdown, rebalancing can be implemented naturally: take withdrawals from whichever asset class has grown to an overweight position. This "withdrawal-based rebalancing" avoids selling assets only to buy others (incurring transaction costs) and ensures the portfolio progressively takes profits from outperforming assets.

Compliance Note

This article is for general information only and does not constitute regulated financial advice. Investment values can fall as well as rise; you may get back less than you invest. Past performance is not a guide to future returns. Asset allocation decisions should be made in the context of individual circumstances, risk tolerance, and financial objectives. Global Investments Limited is authorised and regulated by the Financial Conduct Authority. Seek professional advice before making investment decisions.

How Global Investments Can Help

Designing and maintaining a drawdown investment portfolio that balances income needs, growth objectives, and risk management is a core service we provide. Our advisers work with UK-based and internationally mobile clients to construct drawdown portfolios appropriate to their circumstances — including managing currency risk, designing withdrawal strategies, and rebalancing over time. Contact Global Investments to arrange a drawdown investment review.