Ten years since the introduction of the Pension Freedoms, new analysis from Fidelity International reveals that retirees who followed the ‘4% rule’ and withdrawn 4% annually from a pension pot worth £100,000 from 2015 onwards would now have £189,000 remaining – nearly double their starting amount.
Introduced in April 2015, Pension Freedoms allowed retirees to take control of their pension savings, shifting away from the obligation to purchase an annuity and move towards flexible drawdown and investment options. While this gave retirees the ability to tailor their retirement income, it also left them reliant on market conditions to generate income – and exposed to a potential downturn, particularly in the crucial early years of retirement.
Today, more and more retirees are navigating this challenge. By 2023/24, 2.6 million people had accessed their pension funds flexibly, using them as income while keeping a portion invested for the future1.
With the 10th anniversary of Pension Freedoms approaching Ed Monk, associate director at Fidelity International reflects on the first cohort of retirees who embraced this system.
The class of 2015: a decade of decumulation
To understand how these retirees have fared, Fidelity analysed the journey of a hypothetical individual who retired on 6 April 2015, the first day Pension Freedoms came into effect, with £100,000 of invested pension savings.
Using historical market data, Fidelity modelled how their pension pot would have performed over the decade, factoring in various levels of annual withdrawals and portfolio diversification. The analysis started with a pot invested 100% in global shares, with withdrawals set at 4% a year and then rising annually by an amount to reflect inflation. This is the ‘4% rule’ – a long-standing principle that suggests this level of income is generally sustainable for 30 years of more.
The withdrawal rate was then remodelled for 5%, 6%, and 7% withdrawals, and the exercise was repeated for a diversified portfolio of 60% shares and 40% bonds. Income was taken once a year from the end of the first year onwards.
100% shares – what’s left after a decade of pension freedom?
The table below shows totals for what would remain after each level of withdrawal, along with cash figures for the total income take and the lowest balance hit during the period.
| Withdrawals | Total withdrawn | Pot left after 10 years | Lowest value |
| 4% | £47,779 | £188,977 | £81,660 (11/02/2016) |
| 5% | £59,749 | £169,809 | £80,771 (11/02/2016) |
| 6% | £71,698 | £150,642 | £76,537 (23/03/2020) |
| 7% | £83,648 | £131,474 | £71,925 (23/03/2020) |
Ed Monk, associate director at Fidelity International, comments: “What jumps out immediately is just how well the class of 2015 have done, even if withdrawals were dialled up to 6% or 7% – above what most financial advisers would advise.
“With a 4% withdrawal rate, their pot grew to £189,000. Even at a 7% withdrawal rate, they retained over £131,000, with 10 fewer years of retirement to fund. So, retirees who relied on investments have benefited from favourable market conditions over the past decade.
“However, this is only clear in hindsight, and there have been periods of high anxiety. For instance, those withdrawing 4% saw their pot fall below £82,000 within 10 months of retirement, making it seem unlikely that it would last another 30 years.”
Smoothing out the ride
Fidelity’s analysis also evaluated a diversified portfolio – modelling a portfolio of 60% global shares and 40% bonds. While this approach reduced volatility, it also slightly dampened overall returns.
60/40 lower returns but a smoother ride
Ed Monk continues: “A 60/40 mix effectively reduced downside risk, with the lowest pot value dropping to around £89,000 in the first year, and a smoother ride thereafter. Despite prolonged high inflation and interest rates, which usually hurt bond performance, 60/40 pots grew over the period, even with 7% withdrawals.”
| Withdrawals | Total withdrawn | Pot left after 10 years | Lowest value |
| 4% | £47,779 | £157,892 | £89,845 (25/08/2015) |
| 5% | £59,749 | £141,992 | £89,845 (25/08/2015) |
| 6% | £71,698 | £125,952 | £89,845 (25/08/2015) |
| 7% | £83,648 | £109,983 | £88,979 (11/02/2016) |
Ed Monk concludes: “At a high level it is clear markets have been kind to the first cohort retiring under pensions freedoms with quick recoveries from setbacks like the pandemic avoiding low-price asset sales for income.
“In 2015, those choosing market investments over annuities benefited more. A £100,000 annuity paid £5,304 annually, but market investments provided similar or higher income and often a larger remaining pot2.
“However, past performance doesn’t guarantee future results. Future retirees may not be as fortunate. To mitigate risks, keep a cash reserve for two to three years of income to avoid selling investments during downturns. While it’s important to prevent running out of money, being overly cautious could also mean not making the most of your income.”
The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. Fidelity’s retirement specialists can provide you with free guidance to help you with your decisions.
