How do people spread the risk?

Bufger

I'm 32 and have 9 years service (and pension) in a large company with a defined benefit scheme. I was the in the last year of people to get into this scheme before they only accepted new entrances on a defined contribution.

This scheme is currently changing and long story short, the once 'final salary' is now average salary resulting in a drop for me.

I want to retire at 55-58. I'm Type 1 diabetic so complications are a real possibility and I want to finish work before ill health gives me less options.

If I retire at 57 based on my current trajectory i'll have a pension of £25k + £75k lump sum or i'll have £31k no lump sum. I'm just worried this is likely to degrade more over time - i'm 25 years away and i'm sure the government and/or my employer will find a way to screw me over! So I want to mitigate risks where possible and ensure a comfortable retirement.

How do people spread the risk around and what generally do people invest in for retirement funds outside of the usual schemes? I'm considering a buy to let property as one option - the earlier I do it the better. I'm aware of the financial risks (covering periods of no tenancy, having savings enough to cover emergency work needed etc) - its not something i'd jump quickly into and i'm not looking to make quick money.

Any advice welcomed

LHW99

Put as much as possible into the new pension scheme to get the employers maximum contribution.
If you can afford more, research personal pensions / sipps (depending on your desire to manage your own investments).
Hang onto the DB bit, and don't let anyone tell you to hand it back for a lump sum - its an excellent index-linked insurance against living longer than you expect (medicine is advancing all the time).
Keep reviewing what you have and don't be afraid to get independent advice in maybe 10-15 years time to ensure you're on track.

Linton

Diversify - have as many separate potential income streams as possible. In our case...
1) Fixed rate annuities plus a very small inflation linked DB pension. We dont have the benefit of £25K inflation linked DB pensions, though we have a large amount of invested cash.
2) A portfolio of higher dividend UK shares and global income (equity and bond) funds to generate a steady-ish possibly inflation linked income
3) A portfolio of higher growth funds for the long term
4) Defer State Pension for several years (5-10?) to ensure significant inflation linked income in later life.
5) Possible lifetime mortgage to ensure that minimal equity is tied up in our house.

Aim to ensure income is produced with minimal effort/intervention. For this reason and the possible tie-up of equity we wouldnt consider BTL.

Simplify as much as possible - everything in ISAs/SIPPs so no tax complications.

GunJack

check your figures again based on the career average - I had to check mine a couple of times when ours moved last year, and I gain slightly...it may not be as bad as you think...

davomcdave

LHW99 wrote: »

Put as much as possible into the new pension scheme to get the employers maximum contribution.

While this is excellent savings advice in general terms I'd just introduce a note of caution here. The way I read the OP's post the OP wants advice on risk reduction rather than income maximisation.

To put more and more savings into the employer pension scheme is to put more and more eggs into that single basket, although it is a very attractive basket I admit.

To reduce risk the OP needs to diversify. I'd start off putting money into something like the Vanguard S&P 500 ETF:

https://www.vanguard.co.uk/uk/portal/detail/etf/overview?portId=9503&assetCode=EQUITY##overview

It's incredibly cheap and Warren Buffet recommends that his family invest their fortune in it when he dies!

BTL is an option. My fear with BTL is that:

1. It's a pain in the bottom
2. It's illiquid [i.e. it takes ages to get your money out and buying and selling costs a fortune, no good if you need to raise money quickly for some reason]
3. It is hard to diversify [it's hard to have more than 1 or 2 places so your risk is highly concentrated]
4. The Government seems to be at war with BTL and wants to tax BTLers out of existence with what amounts to retrospective tax hikes

Having said that, plenty of people make money from BTL. I would rather invest into a REIT to put money into property personally. A REIT is a sort of company that owns a number of properties (e.g. shopping centres, warehouses and offices) for rent but is structured in a particular way that is a bit more tax efficient.

If you really want to diversify then you can go for some more oddball stuff like vintage cars, fine wine or antiques. These are investments you can enjoy (don't enjoy the fine wine too much or you'll lose your investment!) and whose prices diversified from other asset prices most of the time. I'd be very careful of investing in those sorts of assets through schemes though as it's an area of investment full of sharks. An old Jag or Rolls in the garage though could definitely be seen as an asset though.

WobblyDog

I think a lot of people unintentionally diversify their retirement funding by having multiple dissimilar pensions. I have 2 deferred final salary pensions and one active DC scheme, so I'm not entirely dependent on any one of them.

Unfortunately, I think it's unlikely your current and future employer(s) will provide even career-average DB pension schemes until you retire, so you will probably end up in a DC scheme at some point, which will provide some diversification.

For me, the most important thing is to understand the fine-detail of scheme I'm currently contributing to, and adjust my contributions to get maximum future benefit. I expect future job and pension regulation changes to provide some automatic diversification.

cns06

I have similar thoughts to the OP, although I am not in a DB pension but a SIPP.

We really started to take it seriously around your age, that's when the financial crash of 08/09 happened and it really woke me up to the fact that you cant rely on stability.

Then came the changes to the pension rules and again that was a bit of a wake up call, as the govt can move the goal posts and nothing you can do.

So we decided to focus on property for now.

We still pay into the pensions of course. We started our first rental property up about 12 months ago. So far its going well. We were lucky that we decided to move house and did not need any of the equity out of the old house so decided to keep it. We only owed a small sum on the mortgage and our lender had no problems with it so why not!

We may look to get another property in the next few years (BTL), but currently watching the market / returns etc.

On top of that we are trying to build our cash savings. Now this is not for everyone as inflation can have a big impact on cash but we hope to stop working at 50, and with the pension age likely to be 58 or higher we need a buffer. With just over 10 years to go before 50 inflation might no have that much of an impact.

Again, if the cash starts to pile up (not likely!) then we might buy that second house - but I prefer the thought of having that nice pile easy to access. No tax worries, no rules about when I can or cant take it out.

There are other forums that might be of use to you, Mr Money Moustache is one I go on quite a bit.

Some other things I have looked at but not bothered with yet is P2P (next on the list), watches, gold and bitcoins.

All are higher risk and tbh given I hope to stop working at 50 I might not bother with any of them.

Our end goal is to have an equal sum in property, pension and cash. We pretty much already hit the property target. Pension, its going ok but as its a SIPP its painful. Cash, this will be the hardest and I don't expect to hit the target with pure savings alone but you never know.

I don't count on inheritance (would not be much anyway) or state pension in any of my calculations. I also have assets which I could sell as I near retirement or into retirement but I don't count that either as you never know what will happen.

My only problem now is I have become quite anal about it all and where as I was checking my accounts once a year or several months now I am tracking performance pretty much weekly or even daily at times.

LHW99

The way I read the OP's post the OP wants advice on risk reduction rather than income maximisation.

I agree on the risk reduction, but the OP also said

ensure a comfortable retirement

IMO, putting more into a pension, especially DB, even a CA scheme, is a good way to ensure a good basic retirement income that would be very difficult to ensure in a DC type arrangement.
I did also suggest investigationing SIPPS where Vanguard funds could be used if the OP has additional spare cash.

And although I agree on BTL, I hope your comments on other "investments" such as wines etc were tongue in cheek. The risk levels on those would be many many time more risky than any additional payment into an employers scheme. Employers schemes have trustees to look after them and the Government will step in and ensure that there is not a complete loss for pensioners, even if the company goes down.
Definately not the same for wines, cars or antiques, or the many other alternative investment types.

Apodemus

One aspect that is seldom discussed is political risk.

Let's imagine that a political party decided to arrange a major transfer of wealth form "haves" to "have nots" (or even to JAMs!). I am guessing that anyone with private share holdings might be put into the "fat cat", "tax them until the pips squeak" category, while a similar sum sitting in an employer pension fund might be protected at all costs. There could then be a scale between the two, with SIPPS, personal pensions, ISAs, BTLs etc ranged somewhere along that gradient.

I would think that a prudent risk reduction strategy needs to take this into account, when considering investments across that range of vehicles.

While I would like to think that those of us with modest investments for retiral might not be targeted too much, there is a growing risk that anyone who has made prudent provision is increasingly so far out of the average range, that we will be seen as worthy of taxing back into line!

Linton

Apodemus wrote: »

One aspect that is seldom discussed is political risk.

........

What risk mitigation strategies would you suggest beyond diversification across multiple methods of financing retirement?

michaels

Apodemus wrote: »

One aspect that is seldom discussed is political risk.

Let's imagine that a political party decided to arrange a major transfer of wealth form "haves" to "have nots" (or even to JAMs!). I am guessing that anyone with private share holdings might be put into the "fat cat", "tax them until the pips squeak" category, while a similar sum sitting in an employer pension fund might be protected at all costs. There could then be a scale between the two, with SIPPS, personal pensions, ISAs, BTLs etc ranged somewhere along that gradient.

I would think that a prudent risk reduction strategy needs to take this into account, when considering investments across that range of vehicles.

While I would like to think that those of us with modest investments for retiral might not be targeted too much, there is a growing risk that anyone who has made prudent provision is increasingly so far out of the average range, that we will be seen as worthy of taxing back into line!

Might be rioting on the streets if dc pensions are confiscated and db untouched.