Retirement income, and certainly generating a sustainable income, is a very different kettle of fish when compared to investing where long-term growth is the primary objective; at the very least there are additional considerations around risk, capacity for loss, investment performance (returns and volatility) and investment philosophy.

There are three main ways to manage flexible pension drawdown for income. There is also no right answer as all three methods have their own benefits and drawbacks that should ideally be linked to the client’s circumstances; also not forgetting the role that annuities can play, which we will cover later.

Method 1: Safe withdrawal rate

The first method is the tried and tested ‘safe withdrawal rate’ where retirees should theoretically be able to draw down 4% of the value of their invested pension per annum from a balanced portfolio (60:40 equities and bonds) without it affecting the capital.

The main benefit is that this method is simple to set up and manage – less time spent on managing nuances within this drawdown process in turn means it costs less to deliver. Coupled with the fact that the concept is relatively easy for the client to understand (hello Consumer Duty), particularly if they’re lacking knowledge and experience.

The main drawback is that it doesn’t address sequencing risk, meaning that the strategy is more susceptible to ‘pound cost ravaging’ (i.e. having to sell a greater number of fund units to achieve the same level of cash income once sold) in falling markets.

This style of strategy typically lends itself to clients who have relatively straightforward income needs from a single wrapper; or for those clients who are not looking for a long-term sustainable income and looking to draw down their pension pot to zero in their lifetime.

Method 2: Natural-income portfolio

The second tried and tested method is a natural-income portfolio. This is where the underlying investments are relied upon to generate an income yield through dividends and interest that are paid out from the investments rather than re-invested for growth.

A natural income portfolio is also relatively simple to set up and can be very tax-efficient, particularly if the assets are outside of a pension wrapper (retirement income needn’t all be about pensions!). Natural income is also relatively easy to monitor and manage once set up,  and is again a straightforward concept that the majority of advised clients will have little trouble understanding. As the types of underlying assets within an income portfolio are generally lower risk (cash, fixed income and large, mature company equities with a strong dividend yield) they can be useful for those clients of a lower risk profile.

However, there is no guarantee of the level of income as dividends, in particular, are not guaranteed and are relative to the capital value of the holding – not ideal in a market crash. Interest-rate risk also comes into play and will depend on prevailing market conditions (it is currently, as of April 2025, relatively high compared to the overall post-2008 landscape but is likely to continue falling progressively over the next few years). Natural income yields are also relatively low – typically (again, as at the time of writing!) between 3% and 4% per annum, with some higher-yielding strategies available that also come with higher risks on the capital side. Ultimately, this means clients will ideally have the combination of a large investment portfolio combined with a modest expenditure to get the best out of a natural income portfolio.

Method 3: Multi-risk bucket approach

The final method for flexible income is one that has really been picking up pace in recent years, and that is the Multi-Risk bucket approach (or cascading approach, or waterfall strategy, or potting strategy – take your pick!) The thinking behind this is to manage client assets over differing levels of risk to build additional resilience should markets drop. It needn’t be a market crash either, a bucketing approach can help ride out a stagnant or steadily falling market too.

There is no correct answer on how to run a bucketing strategy either – it can work with as few as two buckets with some discretionary fund managers using seven. The investment time horizons are also very much down to the preference of the advice firm, perhaps having to work around how a risk profiler works with some being easier than others. The most common approach here though is the three-bucket strategy with a set number of years’ income in cash (usually between 1-2 years) with 4-5 years in a ‘consolidation’ pot (purely to keep pace with inflation) with the remainder being invested in a higher risk portfolio to drive the long-term growth. The rationale here is that the client can comfortably ride out a 1-2 year period in the aftermath of a market crash without having to sell down their investment assets at a loss, perhaps a significant loss, and crucially can leave these assets invested for the inevitable recovery.

The main benefit of this style of approach is that, in theory, you can achieve the highest levels of investment growth whilst also having some protections in place for sequencing risk mitigation – during unfavourable market conditions, the process of topping up the lower-risk buckets can be switched off without detriment to the client (hello once again, Consumer Duty and prevention of foreseeable harm) for however long their cash bucket is able to fund their income.

A bucketing approach is a lot more hands-on to manage though, with multiple investment strategies to monitor in terms of performance and having to hold a review meeting at least every year where the buckets are rebalanced to ensure the strategy is ready to kick in should markets take a turn. This style of strategy also ideally needs a sizeable pot of invested assets (again, it doesn’t need to just be within a pension, but ISAs and GIAs can also play a valuable role) relative to the client’s desired level of income to operate to its maximum potential. Clients who are not well-versed in investments may also struggle to grasp the concept of how it works and be more likely to panic-sell assets from their high-risk growth pot in difficult market conditions; in light of Consumer Duty, this could be considered a foreseeable harm and care should be taken as to who this style of strategy could be suitable for.

It is very good practice to secure a client’s essential expenditure at the minimum with some form of guaranteed income before implementing any of the above drawdown processes. If a client’s State Pension or any Defined Benefit pension income (the two most common forms of guaranteed income) are not sufficient for this, then this is the perfect case for an annuity. As a very brief recap, an annuity will pay a certain level of income agreed at outset, over a certain time frame agreed at outset (can be fixed term if you are just bridging a gap for other forms of guaranteed income to come into payment or set up for a lifetime income) for an agreed initial lump sum payment or ‘premium’. Coming back to the prevention of foreseeable harm, securing a client’s essential expenditure with guaranteed income ensures they will be able to get by without potentially falling into income problems during retirement.

Concluding thoughts

In conclusion, there are many ways of going about securing a sustainable retirement income from invested assets and there is no perfect answer, or indeed even a correct answer. Any of the above approaches are viable but they must be considered alongside the client’s individual circumstances, the way your firm operates and, ideally, a cashflow forecast should be prepared to ensure the sustainability of income before proceeding with any strategy. Perhaps most importantly with the FCA not stating how retirement income should be managed it should have a robust rationale behind it. To quote my old maths teacher on the bigger and more complex questions “The examiner is not looking for the correct answer, they are looking for how you got to it” and I think that is a good mantra to follow when it comes to implementing a retirement income process.

Alasdair Wilson – Investment Specialist at Verve