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Retirement and risk – striking a balance

Updated: Feb 3, 2021


Retirement and risk – striking a balance


The impact of COVID-19 caused extreme stock market volatility, with the average pension fund falling over 15% in Q1. While some of that value may have been regained over the last few months, pension savers remain understandably cautious.

In the past, the level of risk to which pension funds were exposed would reduce on the approach to retirement – a strategy called ‘pension lifestyling’. This approach involves adjusting your portfolio to replace riskier assets with lower risk (although usually lower returning) options such as bonds.

In the current climate, with 1.5m workers planning to delay their retirement as a result of the pandemic and many more concerned about the continuing impact of stock market volatility, is pension lifestyling relevant at the moment?

Greater income needs Just a few decades ago, the average pension pot would probably have needed to last for 20 years of retirement. As life expectancy increases, however, that period has stretched to 30 or even 40 years in some cases. As a result, it’s likely you’ll need to maintain some level of investment risk in order to generate the income required to live in comfort for the duration of your retirement – however long that may be.

Keeping up with inflation Even if you have enough in your pension pot now to keep you comfortable, inflation has the potential to erode the purchasing power of your savings over the passage of time. Therefore, lowering risk as you approach retirement, may not always be a suitable course of action, depending on your circumstances.

Risk and reward The pandemic may have made you reflect on your attitude to investment risk but accepting a certain level of risk could ensure that your pension pot keeps up with, or even beats inflation. It could also help you save additional income for potential extra costs, such as long-term care fees. It’s important to balance risk by diversifying your portfolio and perhaps setting aside some readily available cash in low-risk bonds or a savings account, to act as a buffer.

Financial advice is vital In today’s uncertain environment, taking financial advice can make the difference between a comfortable retirement and living in reduced circumstances. We can assess your personal situation and work with you to create a tailored plan for your pension that is aligned with your objectives, time frame and attitude to risk. If you’d like to understand how your approach to your pension should change in the run up to retirement, please get in touch.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

The value of investments and income from them may go down. You may not get back the original amount invested.


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