Should you de-risk your pension in the run-up to retirement?

As you approach retirement and start planning for life after work, it can be of the utmost importance to carefully manage and make the most of your pension.

The final few years of your career in particular can present an opportunity to boost your pension savings. In the twilight of your working life, you might reach your peak earning years, and so making contributions to your pension from this income can be hugely valuable.

Not only can you benefit from additional contributions made from your sizeable earnings, but you are also likely to be a higher- or additional-rate taxpayer. As a result, you may be able to claim an additional 20% or 25% Income Tax relief respectively, on top of the 20% basic-rate relief you receive as standard.

On the other hand, this can also be a slightly uncertain period. As your pension assets are invested, there remains a risk that your holdings could fall in value at a pivotal moment. Unfortunately, this is an issue that many savers have had to face this year.

As such, it’s important to assess your pension’s risk level, and act in line with your goals, as you approach retirement. Read on to find out more, and how working with a Kellands financial planner can help.

A process called “lifestyling” is often used to reduce the risk of pension loss at the point of retirement

As the Guardian reported in March 2023, some older pension holders who had planned to retire this year saw their funds fall by 20% or more over the previous 12 months.

This can be concerning, particularly if you are close to retirement, because your goals for later life may be based on the pension income you thought you would have.

Yet, because of this market volatility and uncertainty, your pension savings could actually be lower in value than you expected when you come to start making withdrawals.

Interestingly, pension providers often try to account for such events by reducing the risk your pension is exposed to, through a process called “lifestyling”. This was designed for those wishing to buy an annuity at the point of retirement, to ensure that a pension is in favourable conditions for that exchange.

So, as you approach retirement, your workplace pension provider may notify you that they’re moving your pension into a “less risky fund”.

Essentially, this involves reducing the number of high-risk investments targeting growth, and instead choosing lower-risk options with a lower rate of return.

For example, it often includes a shift from stocks and shares – which tend to fluctuate more in value – to investments in more traditionally stable asset classes, such as bonds.

Crucially, a workplace pension provider may carry out this process automatically as you approach retirement. This makes it crucial to decide in advance whether you’re happy for lifestyling to take place, or if you’d rather maintain your current level of risk in your pension investments.

While this approach is often still used, especially by workplace pension providers, it may not be appropriate for you.

Staying invested throughout retirement may mean lifestyling isn’t beneficial for your pension

While pension lifestyling sounds like a sensible strategy, there are times when it may not benefit your wealth – and could even harm it.

As the example in the Guardian shows, one retiree saw their pension’s value drop by more than 20% after being moved into a lifestyling fund.

In fact, some funds even lost nearly 40% amid the market turmoil from Kwasi Kwarteng’s mini-Budget in September 2022.

Part of the reason for this is related to bonds and their relationship with interest rates. Bond prices typically tend to fall when interest rates rise.

So, because the Bank of England increased the base rate for the 14th consecutive time in August 2023, bond prices have been falling. In turn, lifestyle funds may also have dipped if they were predominantly constructed of bonds, taking the value of many people’s retirement funds down with them.

So, for the reasons listed above, lifestyling may not be the most advantageous option for your wealth over the long term.

This being said, it is still vital to weigh up the level of risk your pensions are exposed to as you approach retirement. This includes any workplace pensions you have, and any self-invested pots too.

Here are two alternative risk management steps you could take in the few years before you retire with the help of a Kellands financial planner.

1. De-risking your pension while remaining diversified

While lifestyling may not be the risk management strategy you choose, you could still de-risk your pension in a way that suits your goals.

For instance, with the help of a Kellands financial planner, you could assess your current pension investments and their risk levels in the few years leading up to retirement.

After discussing how and when you wish to draw your funds, your financial planner could help you move your funds into a lower-risk portfolio.

Crucially, unlike in a lifestyled pension, your assets can remain diversified – the selection and proportion of assets you invest in may just be different than before.

2. Increasing your pension’s risk level to potentially maximise growth

Some pension holders may wish to increase their pension risk levels when they retire in order to potentially maximise growth.

Indeed, reducing risk is not the only option – and if you’re planning to stay invested throughout retirement, opting for a higher-risk asset allocation could be a smart move.

Working with your Kellands financial planner can help you create a bespoke retirement plan

With all this in mind, you may be wondering how to approach the risk management options that lie ahead.

Fortunately, this is where working with a Kellands financial planner can be so powerful. We can help you consider the most appropriate route and create a bespoke retirement plan that suits you.

Crucially, we can do this with your goals in mind, making your money fit around your targets and objectives for the future.

If you would like to discuss how we can help you manage your pension so that you can achieve your dream retirement, please do get in touch.

Email us at hale@kelland.co.uk, or call 0161 929 8838 to speak to an experienced adviser.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for general information only and does not constitute advice. The information is aimed at retail clients only

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