Under the current rules, pension drawdown generally becomes an option from the age of 55. » MORE: Your pension options at retirement What are the pension drawdown rules? In turn, this means there is no guarantee that entering pension drawdown will provide you with an income for the rest of your life, unlike an annuity that will pay a regular income until you die. However, by remaining invested, there will always be the risk that your pension fund could fall in value or be depleted altogether. These payments can be set up to provide you with a regular income or can be taken on an ad hoc basis as and when you want.īecause of this, pension income drawdown is generally regarded as providing the most flexibility of all the options for accessing a pension at retirement. Pension drawdown allows you to take – or ‘draw down’ – payments from your pension to provide a flexible retirement income. So how does pension drawdown work, what are the pension drawdown rules, and is pension income drawdown right for you? Read on to find out. This means you can draw a retirement income but your remaining pension fund retains the chance to benefit from investment growth over a longer period, an opportunity that is lost if you buy an annuity or take all of your pension savings as cash. Additional ResourcesĬFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.Pension drawdown, or pension income drawdown as it is also known, is a flexible way of accessing the money in your pension while it remains invested. It is important since investors want to determine how much time it will take for their investments to regain a high value after a downfall. In fact, a drawdown optimized portfolio not only offers low drawdown levels but also ensures that the average time taken for the asset to regain a new peak is under two years, before the drawdown. Such a portfolio will show the lowest volatility levels among different asset combinations. By substituting MDD for their respective volatilities, a basket of assets can be created with the least values of MDD. Portfolio optimization determines a basket of high-quality assets based on their expected returns and volatilities. Using drawdown to construct such a portfolio is an effective way to ensure investing in a profitable venture. Investors ultimately aim to own the best portfolio of assets that offers the highest expected returns and the lowest associated risk. Despite a high absolute value, the stock of Tata Motors performed better than the market. If the MDD of an individual stock is less than that of its benchmark index, it means that the former outperformed the index, even if the MDD value of the stock is high in absolute terms.įor example, the MDD of Tata Motors is high at -40% over a certain time period, and that of its benchmark index, NIFTY, is -50%. The maximum drawdown for an asset can be compared to that for a stock market index in order to evaluate the asset’s performance relative to the market. In addition to associated risk, maximum drawdown also acts as an indicator of market performance. On the other hand, another investor who is willing to take up a higher risk in return for a higher return would choose assets with higher MDD values. While comparing two investment options, an investor who wishes to receive the guarantee of stable returns would most likely choose the option with the lower MDD value. Maximum drawdown is often used to measure the associated risk with a certain asset or a portfolio made up of a basket of assets.īy measuring the difference between the highest peak and the lowest trough values of an investment, MDD shows the volatility of its value in the past, and it provides an almost accurate way of predicting future price movements.Ī low MDD value indicates slight fluctuations in the value of the investment and, therefore, a lesser degree of risk, and vice versa. It can be due to a decline in the market value of the asset or general market turbulence caused by external factors. In broad terms, investment risk refers to the possibility of incurring losses on one’s investment. Maximum Drawdown as a Measure of Investment Risk In addition to associated risk, maximum drawdown also acts as an indicator for market performance.By measuring the difference between the highest peak and the lowest trough values of an investment, MDD shows the volatility of its value in the past, which provides an almost accurate way of predicting future price movements.Maximum drawdown (MDD) measures the maximum fall in the value of the investment, as given by the difference between the value of the lowest trough and that of the highest peak before the trough.
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