By Giliker Flynn – Family-run independent financial advisers, helping families enjoy stable, confident retirements.
Why Volatility Matters in Retirement
Market volatility can feel uncomfortable at any time — but in retirement, it can be dangerous.
When you’re working, short-term dips don’t matter as much. But when you’re drawing an income from your pension, falling markets can:
Reduce your pot’s value just as you withdraw from it.
Increase the risk of your money running out sooner.
Force you to sell investments at lower prices.
Undermine confidence and lead to emotional decisions.
This is known as sequencing risk — one of the biggest threats to drawdown sustainability.
A smoothed investment journey aims to reduce these shocks and give you a more stable experience.
What Is a Smoothed Investment Strategy?
A smoothed investment strategy uses mechanisms to smooth out short-term market fluctuations, delivering a steadier performance curve over time.
How It Typically Works:
Daily or monthly smoothing is applied to investment returns.
Instead of tracking market ups and downs exactly, the value of the investment is adjusted gradually.
This creates a “smoother line” of growth, reducing short-term volatility.
The underlying investments still grow, but you don’t see the full impact of day-to-day market moves.
Providers may use different methods, but the principle is the same:
→ Reduce volatility without significantly reducing long-term growth.
Common Smoothing Techniques in the UK Market
1. Averaging Returns
Returns are averaged over a set period (e.g. 26 or 60 weeks).
This means short-term peaks and troughs are smoothed out.
2. Reserve Accounts
Some providers hold reserves in good years to help support returns in weaker years.
This can help maintain consistency of income.
3. Lagged Pricing
The fund value is calculated using previous periods’ values rather than current market values.
This softens the immediate impact of market shocks.
These approaches vary between providers such as Prudential, LV= and others, but the outcome is similar: a more stable investment experience.
Why Smoothing Can Help in Retirement
1. Reduced Sequencing Risk
A smoother investment return profile means you’re less likely to experience large losses at the exact time you’re drawing income.
2. More Predictable Income
A steadier growth path helps support consistent withdrawal levels, which can extend the life of your drawdown pot.
3. Improved Behavioural Outcomes
Many investors panic during downturns and make poor decisions. A smoothed approach reduces emotional reactions.
4. Less Need for Cash Buffers
While a buffer is still sensible, smoothing can reduce the amount of capital you need to keep in cash, which can improve long-term growth.
How Smoothed Funds Fit into a Retirement Portfolio
Smoothed investment products can be used as part of a layered income strategy:
Core stable layer — providing lower-volatility growth to support regular withdrawals.
Growth layer — invested in equities or higher-volatility assets for long-term inflation protection.
Cash layer — for short-term spending needs and emergency funds.
This structure allows retirees to balance stability and growth, making their overall income plan more resilient.
Typical Characteristics of Smoothed Funds
FeatureSmoothed FundsTraditional Equity FundsVolatilityLowerHigherReturn potentialModerateHigher (but more volatile)LiquidityUsually dailyDailySmoothing lagYesNoSuitable for drawdownOftenCan be, but requires careful managementBehavioural comfortHighCan be more challenging
Smoothed funds are not designed to beat markets — but to provide a calmer journey and more predictable outcomes.
The Role of Smoothing in Decumulation Strategies
Smoothed investment strategies work best as part of a decumulation plan rather than a standalone investment.
Key Benefits in Decumulation:
More stable income withdrawals
Reduced risk of crystallising losses
Greater confidence during downturns
Potential for lower cash buffers (more money stays invested)
Easier income planning and budgeting
This makes them particularly attractive for risk-averse retirees or those relying on drawdown for most of their income.
Potential Downsides to Be Aware Of
While smoothing has clear benefits, it’s important to understand the limitations:
Lag effect: In sharp market downturns, the fund may appear stable at first — then adjust later.
Lower upside capture: You may not benefit fully from rapid market rallies.
Provider-specific rules: Different smoothing mechanisms produce different outcomes.
Not a guarantee: Smoothing reduces volatility, but doesn’t eliminate investment risk.
Less transparency: Some investors prefer to see real-time performance.
A good adviser will explain these nuances and help ensure expectations are realistic.
Inflation Considerations
Smoothed investments are typically moderate-risk, moderate-return.
They can help preserve real purchasing power better than cash.
But they may not always keep pace with higher inflation.
Combining smoothing with a growth component can help address this.
A well-structured portfolio may use smoothed funds for core income stability and equities or real assets for inflation protection.
Tax and IHT Implications
Smoothed investment funds held inside a pension wrapper:
Are not taxed while they remain invested.
Withdrawals are taxed as income, just like any other drawdown.
From April 2027, unused pots are included in the estate for IHT, so how much remains invested vs drawn matters strategically.
Using smoothed strategies may allow you to draw more confidently and steadily, helping with tax planning and IHT reduction through planned withdrawals and gifting.
When Smoothed Strategies Work Best
Moderate risk tolerance – you want stability but don’t want to sit in cash.
Regular income withdrawals – especially if drawdown is your main retirement income source.
Long retirement horizons – where managing sequencing risk matters.
Blended portfolios – combining smoothed funds with growth assets for inflation protection.
Case Studies
Case Study 1 — Reducing Sequencing Risk
Susan, 64, invests £300,000 of her £500,000 pot in a smoothed fund and keeps £200,000 in growth investments.
When markets dip, the smoothed portion provides stable income.
She avoids selling equities at a loss.
Her portfolio lasts well into her 90s.
Case Study 2 — Emotional Comfort, Financial Strength
David, 67, felt anxious about market volatility.
He moves 60% of his pot into a smoothed fund.
Regular income continues during downturns without major drops in fund value.
He feels more confident staying invested — and avoids panic selling.
Case Study 3 — Inflation-Protected Balance
Margaret and John, both 70, use:
50% in smoothed funds for stable income
30% in equities for growth
20% in cash reserves
This layered structure balances security and inflation protection, creating a smoother income journey throughout retirement.
Common Mistakes to Avoid
Believing smoothing eliminates all risk — it doesn’t.
Putting 100% into smoothing and losing long-term growth potential.
Not understanding how the smoothing mechanism works.
Failing to review strategy as conditions change.
Ignoring inflation over time.
Our View at Giliker Flynn
Smoothed investment strategies can be a powerful tool for retirees — particularly those drawing regular income.
They help reduce sequencing risk.
They give emotional confidence to stay invested.
They fit naturally into layered decumulation strategies.
But they’re not a silver bullet, and should be blended intelligently with other investments.
Used well, smoothing can make retirement less stressful and more resilient.
Practical Next Steps
Review your tolerance for volatility and income needs.
Assess whether smoothing fits into your overall income strategy.
Compare smoothing mechanisms across providers — they vary.
Blend with growth assets to protect against inflation.
Factor in tax and IHT implications from 2027 onwards.
Work with a regulated adviser to build a strategy tailored to you.
Conclusion
Smoothed investment strategies offer retirees a steadier, calmer investment journey, especially during drawdown.
By reducing volatility and sequencing risk, they can extend the life of your pension pot and help you take income with more confidence.
Blended with other assets, they provide a strong foundation for a resilient and sustainable retirement plan.
Important: Tax and pension rules can change, and their value depends on your circumstances. Always seek regulated financial advice before making decisions.
Giliker Flynn is a family-run, independent financial advice firm helping people across the UK build stable, tax-efficient retirement income strategies.