A reader wants to know whether to change where their pension is invested due to recent volatility in the markets
In our weekly series, readers can email in with any question about retirement and pension savings to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he does not know about pensions. If you have a question for him, email us at [email protected].
Question: The stock market turmoil of the last two weeks has made me finally bite the bullet and take a look at my pension investments. I’m 55 and planning to access my tax-free cash in ten years (all being well).
I’m minded to keep flexibility in the early years of retirement through drawdown, although I may buy an annuity later on depending on how rates are doing. Should I be moving towards less risky investments between now and my 65th birthday?
Answer: Periods of turmoil in the stock market can be nerve shredding for investors, particularly when the catalyst of volatility is as unpredictable as the President of the United States.
The good news is that market movements over a couple of weeks should make little difference to your pension investment strategy, which in the vast majority of cases is focused on delivering investment returns over a decade or more.
However, periods of volatility are a good reminder to make sure you are comfortable with the level of investment risk you are taking and to check in with your retirement pot to make sure your investment approach matches your long-term goals.
Generally speaking, those with a longer time horizon can take a bit more investment risk as they are able to ride out short-term stock market wobbles with the aim of benefitting from long-term investment growth.
For those saving for retirement, the point where your approach to investing usually needs to be reviewed (but not always fundamentally changed) is around five years before you access your fund. Whether or not you need to make any changes at this point in time will depend on how you are currently invested and how you plan to access your pot.
Let’s start with your tax-free cash. Those aged 55 or over are able to take up to a quarter of their fund completely tax-free, with this minimum access age due to rise to age 57 in 2028.
If you have a specific plan for your tax-free cash – such as paying off your mortgage or making home improvements – you may want to take a bit less risk with your fund as you approach that date, so you know with a little more certainty how much you’ll be able to take when the time comes.
As you are planning to take the rest of your pension flexibly through drawdown, you may still feel comfortable taking investment risk as your time horizon will still likely be well over a decade.
Many people who go down this road look to pivot their investments from those aiming to deliver capital growth to those focused on delivering income. Once you’re taking an income in drawdown, you will likely want to hold a decent chunk of your portfolio – between 12 and 24-months’ expenditure – in cash so you can access it to fund your day-to-day spending.
If you do decide to buy an annuity, then the aim of the game is usually ‘derisking’ as you prepare to convert your pot into a guaranteed income for life. This normally involves shifting your portfolio out of equities and into bonds, which effectively act as a ‘hedge’ because their value tends to move in the opposite direction to annuity rates. This allows you to lock into an income level as you approach the date of purchasing an annuity.
Lots of people will be in ‘lifestyling’ funds which target annuity purchase by moving your money into bonds automatically as you approach your chosen retirement date. If you are in one of these funds but don’t plan to buy an annuity, you should consider switching your investments to something which better matches your retirement plans.
This is because bond prices can be very volatile and if you aren’t planning to buy an annuity, you are missing the other side of the hedge, meaning you risk being overly exposed to spikes and falls in this part of the market.
