When Should You Start De-Risking Your Pension?

Written by Karen Bryan

coinstack1If you are planning to buy an annuity, conventional wisdom recommends that you should start de-risking (a.k.a life-styling) your pension ten to fifteen years before you are planing to retire. This means moving your pension pot into lower risk funds in order to lock in the value. If the stock market were to crash just before you were due to retire, your retirement plans could collapse, as the size of your pension pot could dramatically drop.

However, by de-risking you are losing out on the potential higher gains of higher risk investments. My husband had a small stakeholder pension with Legal and General and the annual interest wasn’t even enough to cover the annual management charge. This illustrates that if you play it too safe, your pension pot could be losing spending power if inflation is running at 2-3% and the value of your pension pot remains static.

I plan to buy an annuity with the cash in my stakeholder pension next April when I’ll be 55. A fair chunk of my pension pot is still in high risk investment funds. This could prove to be foolish if the stock market were to take a dive between now and April.

My reasoning is:

  • I stand to gain (and lose) most as the pension pot is at its largest now.
  • I’m not depending on receiving income from my pension pot; we can live on my husband’s occupational pension and my earnings if the value of my pension pot falls,
  • My personal pension is our main exposure to the stock market. We have a good spread of money in Cash ISAs and property.
  • I have started making my new pension payments into a low risk cash fund. I’m keeping an eagle eye on the value of the high risk funds in which part of my pension pot is held and may transfer into a low risk cash fund if I believe that the fund price is high or that the prices will fall soon.

It’s more evidence of how hard it is to plan retirement based on a personal pension.

Update 29 March 2014 – My pension pot is now in a cash fund ready for me to buy an annuity next month.