How have drawdown products coped with a return to volatility?

Markets have since recovered, but conditions have remained less benign, with the first quarter of 2026 providing the latest example of renewed downside pressure.

When considering defined contribution (DC) decumulation, investment time horizon matters. Younger savers who are further from retirement generally have more time to recover from market shocks, so they can usually take more investment risk in pursuit of higher returns. By contrast, members who are close to, or already in, retirement have less time to recover from losses and may need to trade some expected return for lower exposure to severe drawdowns.

How retirees access their savings is critically important, and many people will understandably feel unqualified to make such a significant decision. The FCA pathways, outlined below, aim to provide structured and regulated options that, in theory, sort pension savers into four understandable buckets:

• Pathway 1: "I have no plans to touch my money in the next five years" — for those who wish to keep their pension savings invested and are not planning to make withdrawals in the short term.
• Pathway 2: "I plan to use my money to set up a guaranteed income annuity within the next five years" — for those who intend to purchase an annuity soon and want their money invested in a way that aligns with that goal.
• Pathway 3: "I plan to start taking my money as a long-term income within the next five years" — for those planning to draw down their pension savings gradually to provide a regular income over the long term.
• Pathway 4: "I plan to take out all my money within the next five years" — for those who intend to withdraw all their pension savings over a short period.

These pathways are not perfect. There is a significant difference between wanting to enter drawdown tomorrow and doing so in five years' time. As a result, a Pathway 3 strategy is often offered with the flexibility to begin taking a long-term income while remaining invested in the same strategy. However, these strategies can carry significant sequencing risk: if members are taking a regular income during a market downturn, they may materially reduce their recovery potential.

The key question is therefore whether this sequencing risk has materially affected Pathway 3 members over the last five years. If repeated market shocks have coincided with regular withdrawals, some providers may have struggled to protect drawdown members' assets sufficiently.

The performance of Pathway 3 products from various providers is analysed below. We looked at each strategy for a member who is 72 today, and was therefore 67 five years ago, and tracked the monthly returns of each strategy using the actual returns experienced by the underlying funds. Some of these funds may not have been used as a Pathway 3 product for the full five-year period. We assumed a starting pot size of £500,000 and that the member took an annual income of £25,000, deducted monthly. Given the high inflation over the period, we assumed this amount rose by 5.2% each year, the annualised inflation figure, to simulate maintaining purchasing power. The following chart tracks the residual pot size over the five years.

Changes in Pot Value Over the Last 5 Years

The first point to note is that there is more than £130,000 difference in outcome between the strongest performer, LV=, and the weakest performer, Aegon. While all strategies suffered during 2022, the recovery since then has varied significantly.

LV= and PensionBee left members with more money than they had at the start of the period, despite the drawdowns. Conversely, after five years Aegon saw almost a quarter reduction in fund value. Equity exposure has remained the key driver of performance over the last five years: although equities have experienced instability, fixed income has also been hit hard and has not provided the same returns during recovery periods.

We next project into the future to examine the longevity of the highest and lowest performers. As before, we assume a pot size of £500,000 and an initial annual payment of £25,000. We consider two income-increase scenarios: one where annual withdrawals rise by 3% each year, and one where they rise by 5.2% each year, reflecting the annualised inflation figure used in the historic analysis. At the beginning of the projection period, the member is 67 years old. We apply DWA's long-term expected returns to the underlying asset classes of the funds, then use historic volatility to create 10,000 projections of how the two strategies might perform in future.

• The dotted line shows the median projected outcome at each point.
• The dark line shows the path of the last median outcome.
• The darkest cone closest to the median contains 50% of all projections.
• The next cone contains 80% of all projections.
• The lightest outer cone contains 98% of all projections.

An important objective for drawdown is ensuring members do not run out of money. The ONS expects a 67-year-old male to live for a further 18 years on average, and a 67-year-old female to live for a further 21 years. Allowing for improving life expectancy and the severe downside of exhausting the pot too early, we think a "one size fits all" drawdown solution should ideally target maintaining some capital until at least age 90, or 23 years beyond age 67. In practice, retirement ages are also likely to rise as the state pension age increases, so shorter drawdown time frames may become more viable for some members.

Projections of Remaining Pot Size – LV= – 3% annual rise in income

Projections of Remaining Pot Size – LV= – 5.2% annual rise in income

The higher volatility of LV= leads to a wide range of potential outcomes. In the scenario where withdrawals rise by 3% annually, the median outcome sees the pot last for more than 29 years, with 1 in 10 outcomes running out of money before 19 years (the 80% cone does not include 20% of outcomes, with 10% or 1 in 10 being on the downside). With the 5.2% annual increase in income, the median falls to 21 years, meeting ONS expectations for a median female' s lifespan, but slightly shy of our extended target. 1 in 10 outcomes end up running out of money after around 16 years. Both scenarios have the potential for significant growth in assets.

In practice, we would expect members to adjust their income if their pot size was falling too quickly or growing rapidly. Overall, however, this indicates that the strategy has the potential to preserve some capital for many years, although it may be exposed to larger fluctuations.

Projections of Remaining Pot Size – Aegon – 3% annual rise in income

Projections of Remaining Pot Size – Aegon – 5.2% annual rise in income

The more conservative Aegon strategy produces a much narrower spread of projected outcomes. For the scenario with a 3% annual rise in income, the median value remains ahead of our 23-year target. At the lower end, the figures are broadly similar to LV=, with 1 in 10 outcomes running out of money after around 19 years. With the maintained higher growth in income, the median falls to 20 years, with 1 in 10 outcomes running out after around 16 years.

Overall, the products appear to be broadly doing what they are designed to do. Prolonged high inflation is unlikely; if it does persist, markets may behave differently and the risk data used here may become less relevant. With even the weakest recent performer's median outcome reaching 23 years when assuming 3% growth in payments, drawdown strategy design does not appear to be the main issue in the market. The bigger challenge is ensuring members save enough in the first place to provide a sustainable income.

Pete Osthwaite is head of DC trustee solutions & ESG research at Dean Wetton Advisory