Near-term spending
Lower-volatility assets or cash-like reserves can cover withdrawals in a bad market year, so equities do not have to be sold straight after a fall.
By UK Tax Drag · Reviewed
Research snapshot
Last reviewed
26 September 2026
Who this is for
UK investors planning to spend from a portfolio soon, or designing the pre-retirement structure with drawdown in mind.
How the guide is organised
It starts from the spending the portfolio has to cover, then looks at how much of the portfolio is in shares and what that means when markets fall.
Main risk
Using high-yield equity or overlay products to solve a sequencing problem that really needs cashflow planning and ballast.
Three jobs of a drawdown portfolio
Job 2
Long-run growth
Equities are the usual source of long-run growth. With little or none, a portfolio is more exposed to inflation and to a retirement that lasts longer than planned.
Job 3
Tax wrapper order
The spending source matters. ISA, pension and taxable accounts do not create the same drag or flexibility.
What usually goes wrong
Yield-chasing
High distribution does not mean the portfolio is safer to spend from.
- Dividend ETFs can still be 100% equity risk.
- Overlay-income products can change the return path materially.
- A drawdown plan built on headline yield alone is often fragile.
No spending reserve
Retirees often think about total return but forget the mechanics of selling in bad markets.
- Sequence risk matters most when withdrawals begin.
- Ballast exists to protect the spending plan, not to make a chart look timid.
- The right reserve size depends on flexibility, not dogma.
Common mistake: buying an income ETF because the distribution looks like a wage replacement. A drawdown portfolio needs a durable structure, not a comforting label.
What to build around
| Portfolio job | Examples in the site’s ETF catalogue | Point to note |
|---|---|---|
| Broad growth holding | Global equity index funds such as VWRP (all-world) or SWDA (developed markets only) | A broad index spreads the equity holding across many companies and countries. Tilting towards one region, sector or style is a separate decision with its own risks. |
| Bond holding | Sterling-hedged global bond funds such as AGBP or VAGP, or a UK gilt fund such as VGOV | The bond holding is there to support the spending plan rather than to maximise return. AGGU, a different class of the same iShares fund as AGBP, is hedged to US dollars, not sterling. |
| Spending-rate check | ETF builder, FIRE and pension pages | Looking at the mix and the spending target side by side keeps the two connected. |
Worked example: sequence risk in numbers
Two retirees each start with £400,000, take £20,000 at the start of every year and earn exactly the same ten annual returns: −20%, −10%, 5%, five years of 7%, then 10% and 14%. Retiree A gets them in that order. Retiree B gets them in reverse, so the two bad years come last.
| Portfolio after year | Retiree A (bad years first) | Retiree B (bad years last) |
|---|---|---|
| 1 | £304,000 | £433,200 |
| 2 | £255,600 | £454,520 |
| 5 | £238,927 | £488,008 |
| 10 | £232,887 | £343,383 |
The returns multiply to the same total growth, yet Retiree B finishes the decade £110,496 better off. Withdrawals taken after a fall sell more units at low prices, and those units are not there for the recovery. Holding a reserve of lower-volatility assets, for example two years of withdrawals, is one way to avoid selling equities straight after a fall. It reduces the problem rather than removing it, and the figures are an illustration, not a forecast.
Wrapper order: a 2026/27 tax example
Where each year's money comes from matters as much as the fund list. Take someone with no other income in 2026/27 who takes an uncrystallised funds pension lump sum (UFPLS) of £16,760. Normally 25%, or £4,190, is tax-free and 75%, or £12,570, is taxed as pension income. That taxable part is covered exactly by the £12,570 Personal Allowance, so no income tax is due. Further spending that year could come from an ISA, where withdrawals are tax-free, rather than from more taxable pension income.
- It triggers the money purchase annual allowance. Taking an UFPLS cuts the allowance for future defined contribution pension saving to £10,000 a year.
- The first payment can be over-taxed. HMRC's reclaim forms are P55 if part of the pot was taken and no more payments will be taken that tax year, P53Z if all of it was taken, and P50Z if all of it was taken and work has stopped.
- The State Pension fills the allowance later. The full new State Pension is £241.30 a week, or £12,547.60 a year, which leaves just £22.40 of Personal Allowance for other income once it starts.
- Inheritance Tax changes the order question. From 6 April 2027 most unused pension funds and death benefits will be brought into the value of an estate for Inheritance Tax, which affects whether spending the ISA or the pension first makes more sense.
What to check, and when to get help
- The spending needed over the next two to three years, and which account each year's cash will come from.
- Whether the equity, bond and cash mix could survive a Retiree A decade without forced selling.
- Whether an income fund's distribution rate is being treated as a safe withdrawal rate.
- The effect of each withdrawal on the Personal Allowance, the money purchase annual allowance and, from April 2027, Inheritance Tax.
Pension Wise offers free, impartial, government-backed guidance appointments on defined contribution pension options for people aged 50 or over, including how each option is usually taxed. It explains the options rather than recommending one. A personal recommendation on how much to withdraw, and from which account, comes from a regulated financial adviser.
Best next pages
Portfolio design
Use the ETF builder
See how the asset split, weighted charge and provider concentration change when you alter the mix.
Withdrawal tax
Check pension tax
Wrapper order matters. Pension withdrawal tax and tax-free cash change the spending route materially.
Bond structure
Compare bond ETFs properly
Use the bond-page decision framework if the real question is duration, hedging, or gilt exposure.
More on taking your pension
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