Overspending, see previous post.

The beauty of income drawdown is that you can take as much out of your pension as you want, when you want. But it doesn’t necessarily follow that you should. Selling investments to fund a special holiday or to pay for home improvements for example, could put a significant dent in your pot and reduce its ability to generate income in the future.

“The danger is that people anchor their withdrawals to their current lifestyle or the 25% tax-free cash, rather than what’s sustainable,” says Cook.

There are a number of strategies you can employ to ensure you don’t spend your pension too fast. The ‘4% rule’, for example involves taking 4% of your pension’s value during the first year of retirement. Each year afterwards, you take the same amount plus inflation.

Whatever the market does, the theory goes that your pot should last approximately 30 years. This clearly isn’t guaranteed, and if investment conditions are poor, be mindful that your pot could drain sooner.

Another cautious approach is to limit yourself to only taking the ‘natural yield’ of your pension – that means you live off your investment returns and leave your capital untouched.

Alternatively, you might want to seek the advice of a financial planner who will be able to use cashflow modelling to help you work out what impact different rates of withdrawal will have on the sustainability of your pot across a variety of different scenarios.

Another cautious approach is to limit yourself to only taking the ‘natural yield’ of your pension – that means you live off your investment returns and leave your capital untouched.

Let’s dive into the above and compare the 4% rule and the Snowball.

The Snowball will return income of 10k to be re-invested to earn more income.

The comparison share VWRP, today’s value £131,134.00

Using the 4% rule comparison income £5,245

The comparison share could be higher at the end of the year, or it could be lower that’s the gamble you would take with your retirement.

If we compound both figures at 7%, in ten years

The Snowball’s income £20k

The TR’s income £10,490

If you are lucky to have twenty years to retirement

The Snowball’s income £40k

The TR’s income £20,981

Neither figure is guaranteed but with dividend re-investment you fail by the month and not the year so it’s easier to chart you progress to your end destination.