Protect your retirement fund while maintaining growth potential
When it comes to saving for retirement, many individuals invest their pensions in a variety of funds. These can be pre-selected by your pension provider or chosen individually to align with your goals and risk tolerance.
Traditionally, retirement planning has involved significant investment in share-based funds during the early years to maximise growth. As retirement approaches, however, the focus shifts to de-risking. This strategy diversifies your investments into bonds, cash, and shares to mitigate risk.
While de-risking is a common practice, it requires careful planning and communication with your pension provider to avoid unintended consequences. Without a clear plan tied to your retirement timeline, you may find that de-risking happens too early or late, potentially reducing your retirement savings.
Why de-risking matters
De-risking involves a gradual reduction of exposure to high-risk, high-reward investments like equities as you approach retirement. Instead, your portfolio transitions to lower-risk assets such as government bonds and cash. These safer investments are less volatile, which helps to protect the value of your pension savings during market downturns.
For those with defined contribution pension schemes, de-risking often happens automatically through what is known as a ‘lifestyle strategy.’ This ensures that as you age, your pension assets are allocated in a way that prioritises safety over growth. However, understanding how this affects your long-term returns and aligning it with your retirement age is essential to making the most of your savings.
Communicating your retirement age
Pension providers use your stated retirement age to determine when to begin de-risking your funds. Typically, this process starts 5 to 15 years before your expected retirement date. For instance, if your default retirement age is set at 65, your provider might begin transitioning your assets into lower-risk investments as early as 50.
If you’re planning to work beyond the default retirement age, this early shift may limit your pension fund’s potential growth during your peak earning years. Conversely, if you retire earlier than expected, you’ll risk having a portfolio that is still largely exposed to market fluctuations. Keeping your pension provider informed about your plans ensures that your investment allocation remains aligned with your goals.
How does de-risking work?
De-risking aims to stabilise your pension savings. Early in life, contributions are focused on growth-oriented investments like shares, which tend to be more volatile. While these provide opportunities for higher returns, they also pose a greater risk of value fall.
Over time, your portfolio transitions to safer investments such as bonds and cash. Bonds, essentially loans to governments or corporations, offer fixed income via interest payments. Their predictable nature makes them a staple of de-risking strategies. Cash holdings, despite offering limited growth, provide stability and liquidity.
For example, in the years leading up to retirement, your provider might reduce your equity exposure from 80% to 20%, reallocating those funds into bonds and cash. This shields your savings from sudden market downturns that could occur just as you’re about to access your pension.
Should you stick with higher-risk investments?
There is an enduring belief that bonds act as a safeguard against stock market volatility. Historically, bonds increase in value when shares fall, creating a balance in your portfolio. However, recent market trends have shown volatility in both stocks and bonds, challenging this traditional assumption.
\If you’re comfortable with risk and prioritise growth, staying invested in equities could make sense. Shares often outperform other asset classes over the long term, meaning your savings could grow more.
For risk-tolerant investors, it’s possible to opt out of the de-risking process altogether by notifying your provider and requesting an alternative investment allocation.
What is lifestyling?
Lifestyling is an automatic investment strategy that shifts your pension savings into more conservative assets as you approach retirement. For example, early in your career, the fund may focus heavily on equities to maximise growth. But as retirement nears, it reallocates investments to bonds and cash to minimise volatility.
While this hands-off approach is convenient, it won’t suit everyone. If you plan to retire later or earlier than expected, lifestyling may not align with your specific goals. Revisiting your strategy periodically allows you to adjust your investments and stay on track for your desired outcomes.
Balancing growth with risk reduction
Inflation is a crucial factor to consider when de-risking your pension. The cost of living rises over time, and if your savings barely grow, you may lose purchasing power in retirement. While bonds and cash prioritise stability, they may not generate the returns needed to outpace inflation.
A blended approach offers a potential solution. For instance, you could retain some exposure to equities for growth potential while keeping a portion of your portfolio in bonds to reduce volatility. Working with us will ensure this balance is tailored to your goals and circumstances.
Taking an active role in pension management
The most successful pension plans are those that adapt over time. Regularly reviewing your investments with your provider or adviser allows you to fine-tune your strategy as circumstances change. For example, life events such as a career break, inheritance, or a shift in retirement plans can all impact your pension needs.
Staying informed and proactive ensures your decisions reflect both your immediate and long-term objectives. Whether you follow a lifestyle fund, maintain a growth-oriented strategy, or create a custom allocation, taking control of your pension is key to safeguarding your financial future.
Build a smarter retirement strategy today
De-risking your pension savings is a crucial step in preparing for retirement. By understanding your options and tailoring your approach, you can safeguard your investments while maintaining opportunities for growth. Whether you prioritise security, flexibility, or a mix of both, an informed strategy will assist you in achieving financial stability in your later years.
Planning for retirement can feel overwhelming, but our professional guidance will make all the difference, helping you manage risk while maximising returns. Take charge of your future and secure the retirement you deserve!
