If you’re in a defined contribution scheme, you may be responsible for taking investment decisions about where to invest your pension fund. Conventional wisdom suggests that you should hold more of your pension fund in so called ‘riskier’ investments, commonly equities, when you’re a long way from retirement. The reason for this is that you won’t have that much invested and you have a long time to recover if markets fall significantly.
In contrast, the opposite is usually true as you draw nearer to retirement. You may have a significant amount invested and little time to recover in the event of a serious market fall. Consequently, you should review your investments near retirement and consider whether you should start to move some or all of your money into more secure, lower risk investments. You might start the process 5 years from retirement and move 20% each year out of high risk investments into lower risk investments. Alternatively, you could start 10 years from retirement and move 10% each year.
There are a couple of instances where you may not need to take this action:
- If you’re in a ‘lifestyle’ fund. Lifestyle funds are quite popular with defined contribution schemes. In these funds, your money is automatically moved into lower risk investments in the last 5 or 10 years before you retire so there is usually nothing for you to do. However, in some circumstances, the automatic movement of funds may not be right for you. For example, you may be planning to retire at a different age to the usual retirement date for the scheme. In which case, the automated movement into lower risk assets may start too soon or too late for your purposes. This is not the only example where a lifestyle fund may not be appropriate for your needs. If you are in any doubt, you should take advice on this issue.
- If you are thinking of using ‘Drawdown Pension’. One of the reasons for moving into low risk investments is that you need to cash in your investments if you plan to buy an annuity. Therefore, if there is a market fall as you approach retirement you could be faced with losses (unless you delay your retirement). However, in Drawdown Pension you continue to manage your investments so it isn’t so important to move all of your funds into lower risk investments in the run up to retirement. You may still want to make some changes to the type of investments you hold as you make the move from saving for retirement to drawing on your savings in retirement.
Drawdown Pension is complex and is not suitable for everyone. It is usually not suitable if you have a small pension fund and if you have no other assets or sources of income to fall back on. Even if you have a large pension fund, and other assets or income, a Drawdown Pension may still not be suitable. If you are at all uncertain you should take financial advice.
Note: With most investments there is a risk to your capital and you may not get back the full amount you invest. The value of investments and any income from them can fall as well as rise.