Sep 28, 2020
When Should I Reduce the Risk of My Pensions?
Most pensions have investment risk, which means that the value of your pension can go both up and down and it is important to know when to take more or less risk.
The more risk there is on your pension funds, then the more it can increase in value. However the reverse is true and the more it can fall in value.
However if you do not take enough risk with your pension funds then it will not be able to grow and that could mean that it is not even keeping pace with inflation, or cope with the amount of income you are taking.
There are two times to consider:
- Before retirement
- In retirement
Before retirement
One of the most important things to consider is how much time you have until retirement (when you are going to start to take income from the investment).
The longer period of time you have, then the greater risk you can afford to take. This is because you have longer to ride out any volatility with the pension in order to get greater gains over the longer term.
As you get closer to retirement then you have less time to ride out those fluctuations and therefore it makes sense to take some risk off of the table.
However, you still want to funds to grow. If nothing else to keep pace with inflation so the money is holding its purchasing power.
Another consideration is when you retire, will you be buying and annuity or investing into drawdown?
When buying an annuity your capital is taken out of the markets to purchase the secured income, so it is even more important to avoid negative fluctuation leading up to it.
When investing into drawdown you money stays invested (although the investment is changed to be more income focused). As it will still be invested then that short term volatility has less impact than with the annuity.
In Retirement
If you are buying an annuity then there is no investment risk.
When using income drawdown the risk you will need to take will depend on your objectives and also the level of income you want to take.
Say you elect to take an income of 4% per annum. If the returns on the pension are less than 4% per annum then you will eat into your own capital. You therefore need a portfolio that is able to provide at least that level of returns.
It is important to take advice both before retirement to help the pension to grow well and in retirement to ensure that the income and capital you take are sustainable and make the best of your pensions.
