De-risking for Retirement

Bravepants

Hello all,

I am just looking for some comments on my situation please...apologies as it's a bit long winded!

I will be 49 years old at the end of next month. My work's defined benefit pension scheme is a combination of final salary and average salary. I have built up just shy of 19 years in the Final Salary portion of my pension, and last year switched to the career average scheme.

I have been paying AVCs since I was 40 years old, and have built up a pot of £62k in there. I also have a S&S ISA with £43k in there. Both these pots I class as retirement savings, and intend not to touch either of them to spend, spend, spend!

I'm quite pleased with myself for breaching the £100k barrier by squirreling away extra cash, on top of my pensions, while maintaining a modest but happy lifestyle.

My partner and I have paid our mortgage off and we have no kids. My partner also works and has a work's pension.

My question is one of de-risking the ISA and AVC part of my retirement savings.

I can take the Final Salary pension from age 60 (about £17k per year). I would by then have transferred my S&S ISA and AVC into something a little less volatile, and start to drawdown at the 3% per year level to add to my monthly pension income.

The career average and state pension will kick in from age 67 for me, so I have a little extra buffer for the future as I get older.

However, I could also take an actuarially reduced FS pension from 55, and also do the 3% drawdown of whatever my ISA and AVC pots are at the time, I should be at the same level of income I am now, not counting the extra cash that I stash for my retirement, as I won't need to do that any longer.

I am actually loathe to take actuarial reduction, so IF I do decide to retire at 55 I would probably drawdown a higher percentage from ISA and AVC pots before the FS kicks in. Taking advantage of the annual tax allowance and 25% to take a large lump each year out of the AVC fund. I worked out that I can take around £15k each year (using current figures) from the AVC without paying tax.

Now! Finally to my question. We have seen a high amount of growth over the last few years, and this has obviously contributed to my S&S and AVC pots increase. What are people's thoughts on de-risking at this stage in my plan?

In my pots I have:

ISA: Vanguard Lifestrategy 60 and Fidelity World Fund - giving me a 70% to 30% split between equities and bonds. At age 50 I plan to move out of Fidelity World Fund and wholly into VLS60. I have taken on higher risk because I started saving later in life.

AVC: Scottish Widows Pension Portfolio 3.

But because we have seen such unprecedented "growth", plus the devaluing of the pound due to Brexit etc., I think they might be a bit artificially inflated.

I might leave the ISA alone, but was considering transferring the larger AVC pot to a SIPP and put it into VLS-40. I would plan to do this whether I retired at 55 or 60, but maybe I should do it NOW?

Also, how long is longterm when it comes to investing? IF I would like the option to retire at 55 (6 years away) I need a different de-risk plan than if I decide to retire at 60 (11 years away), as 11 years is longer term an better chance for growth.

I like to keep my investment strategy simple, but these additional considerations do complicate things don't they?

Any thoughts please?

Kind regards,
Paul

redmalc

Paul your scenario is similar to a lot of people out there,I am 61 with Pension pot of 330k,S&S ISA,s 200K,cash ISA,s 140K and shares and NS&I 35K.
I took some profit a month or so ago in my pension and now sit with 70k in cash and will sit tight to see,what happens.
The rest of my investments are somewhat racy and really should be scaled back given my age but it's the fifty Million Dollar question,when ? And if you do what do I do with all of that money given everything is currently in ISA,s tax free and I will be retiring in the next four years.

mollycat

Not as detailed a response as some you will get, (I have one eye on Sky Sports )

Retire at 55 next year, (NHS pension).

Current wealth stored as 30% cash, mostly at good rates and 70% in diversified equities.

Plan is to slowly move away from equities in the forthcoming decades, but no real rush to do so.

At 55 could get run down by a bus tomorrow, but also could live another 35 years!

Thats a lot of investment return time ahead of me, (hopefully)

BLB53

Also, how long is longterm when it comes to investing? IF I would like the option to retire at 55 (6 years away) I need a different de-risk plan than if I decide to retire at 60 (11 years away), as 11 years is longer term an better chance for growth.

I would be wary of basing your strategy around your retirement dates as presumably you will be wanting growth and income for maybe the next 30 - 40 years so I would continue to maintain the VLS60 but be prepared for a few ups and downs along the way.

Equities generally provide the higher returns over time so reducing equities to avoid volatility in the shorter term may not be the solution to de-risking over the longer period.

Zebra

Personally I think the idea of de-risking is a fundamentally sound one, but depends on what income you will need on retirement.

I would be wary of transferring or accessing your AVCs as, depending on which scheme you're in, you may be able to take the whole AVCs tax-free along with your FS pension.

bigadaj

De risking is great in theory but impossible in practice unless you want to accept negative rewards going forward.

A db pension is a great benefit in being able to accept further risk in other savings and investments as it forms the bedrock of pension income in decades to come.

Markets have done well but there's still few alternatives around, keep it in cash and get virtually no returns, and we finally have the prospect of growing inflation. Little sign there's any appetite for increasing interest rates in even the medium term.

The thing to remember is that markets haven't done as well as it seems but are simply a function of cash being devalued.

Many might not see it as derisking but several of teh p2p platforms are now getting their if isa permissions through, certainly risk involved but the prospect of near double digit returns after allowance for bad debt would be attractive and represents another asset class when most form of bonds appear to offer very poor value.

dunstonh

People generally drop a notch or two in retirement but most do not de-risk to cash as that could actually increase risks. Remember its not all about investment risk. There is also shortfall risk and inflation risk.

£100k in cash savings where the interest is drawn to live on will have the value of £65k in real terms after 10 years. Sooner or later, that will lead to capital erosion as the interest is no longer sufficient and the capital gets eaten which creates the spiralling effect of less interest, so more capital being taken until it runs out.

Fully derisking would really only occur if the the funds are being given up at a fixed point in time (such as annuity purchase) or a capital expenditure event.

Bravepants

Thank you everyone for your replies. Your respective points of view are valuable. I think I'll stick to the original plan and keep on drip feeding both my pots as they are for now, and notch down when ready. But yes, keep invested.

Thanks again.

mollycat

mollycat wrote: »

Not as detailed a response as some you will get, (I have one eye on Sky Sports )

Retire at 55 next year, (NHS pension).

Current wealth stored as 30% cash, mostly at good rates and 70% in diversified equities.

Plan is to slowly move away from equities in the forthcoming decades, but no real rush to do so.

At 55 could get run down by a bus tomorrow, but also could live another 35 years!

Thats a lot of investment return time ahead of me, (hopefully)

BTW, did not mean to slowly move away from equities to cash.