Drawdown and movement to 'safer' funds

Spidernick

I would appreciate people's thoughts on this please.

As you approach retirement age most pension pots these days are moved into safer funds, to protect against a crash. However, given that the return on these then tends to reduce, this may not be ideal for those seeking the drawdown option, so I was wondering what the best thing to do in this scenario is?

For my situation, I have a number of pension pots, so could do different things with each one, if needs be. Thanks.

cfw1994

I’m also curious about this
Advice generally tends to be to move pots into gilts, bonds and cash, but looking at the many options in my main Aviva pot, gilts and bonds are still rated 3 or 4 on their risk scale - my general funds (global based) are only 5. Historical returns broadly similar (bit lower for the gilts & bonds), & cash is woeful, losing about 1% each year!
Couldn’t spot any funds rated at 2!

My thought would be to not lower the risk too much - as you say, you still need funds to grow during drawdown - but to have at least a couple of years worth of money much more easily accessible in order to be able to ride out the next inevitable dip. I’m thinking even premium bonds maxed out with some of the tax-free lump sum could provide that, with a small chance of more!

Look forward to more ideas.

232607

My plan is to hold 3 years in cash or something similar that I could draw on in the event of a crash. Hopefully this time period will allow the crash to have recovered.
This allows the rest of the portfolio to remain in mainly equities thus hopefully garnishing descent returns.

Audaxer

Spidernick wrote: »

As you approach retirement age most pension pots these days are moved into safer funds, to protect against a crash. However, given that the return on these then tends to reduce, this may not be ideal for those seeking the drawdown option, so I was wondering what the best thing to do in this scenario is?

I think it was more the case they were moved into safer funds nearer retirement in the past when the only option was an annuity at retirement. If taking the drawdown option now with funds remaining invested, to have a safe withdrawal rate of around 4%, I would think you need around 50% to 60% equities and a decent cash buffer for bad years.

LHW99

I think the original idea of moving funds in the years leading up to retirement was to preserve capital for people planning to buy annuities. People do this less often at NRA because the annuity rates are poor, so its less relevant. Also, someone retiring at 55-60 could expect 25-30+ years in retirement, and over that timescale, as cfw1994 says, you would need the funds to grow to counteract inflation

whatsup7

To my knowledge they still recommend lower risk in drawdown, but interesting thread

dunstonh

As you approach retirement age most pension pots these days are moved into safer funds, to protect against a crash.

Actually, its not a majority. It is a minority but it is common on workplace schemes.

Indeed, following the 2015 changes, the FCA warned providers to review their lifestyle funds and many pulled the fund altogether. Although some introduced multiple versions to cater for different methods. This requires the person to pick the method though.

To my knowledge they still recommend lower risk in drawdown, but interesting thread

There is no such recommendation. A decision on risk is personal to your circumstances. Some people may drop a notch on the risk scale but many will stay the same risk.

OldMusicGuy

dunstonh wrote: »

A decision on risk is personal to your circumstances. Some people may drop a notch on the risk scale but many will stay the same risk.

Indeed. It depends entirely on your financial situation and how you will spend money over your retirement. In our situation, I have accumulated enough in the pension that we do not need significant growth to lead a comfortable enough retirement. If our investments keep pace with inflation we will be fine. So I am holding a lot of fixed rate savings bonds and the core of my investments is a lower risk fund than I would use during the accumulation phase. But that strategy may not be suitable for someone that has not accumulated as much.

kidmugsy

cfw1994 wrote: »

I’m thinking even premium bonds maxed out with some of the tax-free lump sum could provide that, with a small chance of more!

Our TFLS money is in high interest cash accounts (regular savers and current accounts) and annuities (by deferring State Pensions).

The money still in pensions has been tilted in the direction of gold and commodities. We hold no bonds. Other than our owner-occupied house we hold no property.

We'd happily use Premium Bonds if we were in any danger of using up our savings interest allowances.

bostonerimus

The asset allocation you have for retirement drawdown is going to depend on the amount of income you need from your pensions and your attitude to risk. For example if you have a large pot and need a small income you can afford to be conservative and put your money in safe, but low return, accounts and investments. Alternately you might invest in risky high return things because you can afford to lose a lot of money.

But most people are going to want to optimize their withdrawals so they can get a good income from their pot for the length of their retirement, The difficulty is that you don't know how long you'll live, the future rates of inflation or your investment return. But you can make educated guesses and there are many studies that you can use to help you. They us historical data and statistics and find that there's a very high probability that you can make your pension pot last for 30 years and produce an inflation linked annual income if you invest in 60% equites and 40% bonds and start by taking out 4% of the pot (this might be a bit lower in the UK)...that percentage rises with inflation each year. Add in a couple of years of cash to spend in down turns as even more insurance and you should be ok.

Thrugelmir

bostonerimus wrote: »

They us historical data and statistics and find that there's a very high probability that you can make your pension pot last for 30 years and produce an inflation linked annual income if you invest in 60% equites and 40% bonds and start by taking out 4% of the pot.

The actual study was performed in 1994.

If you want your savings pot to last 30 years or more. Then under 3% is suggested.