Aviva phased switching

Traveljunky

I have a small pension pot of £25000 with Aviva due to pay out in 5 years. I’ve just received a letter asking me if I want to move to a Phased Switching option. Can someone explain what that means and if it is worth taking this option for such a small pot?
Thanks

Linton

The idea is that as you approach retirement your pension pot is steadily moved into more cautious investments so that if there is a crash in the meantime your retirement plans are not seriously affected.

This made great sense when people had to buy annuities as their entire pot would be spent at the start of retirement.  Now with most people using drawdown it is less of a good idea since they will be staying invested for perhaps 30 years.  Going cautious right at the start is not a good way of dealing with long term inflation.

In your case with a very small pot it presumably wont make much difference overall.  If you want to ensure you still have something like a £25K pot when you retire it would be prudent to derisk now, perhaps even putting the whole pot into cash.  However if you intend to stay invested for the long term derisking now makes no sense at all.

Albermarle

The only caveat I would add to the post above , is that it could depend on what you  are actually invested in now ?
If it is a higher risk investment then it might be worth lowering the risk level a notch, even if you want to stay invested longer term.

Traveljunky

I think it is higher risk at the moment and it has been performing well. It is so small though and I’m lucky to have a good pension from my previous employment that I think I’ll probably leave it were it is.

robatwork

Linton said:

This made great sense when people had to buy annuities as their entire pot would be spent at the start of retirement.  Now with most people using drawdown it is less of a good idea since they will be staying invested for perhaps 30 years.  Going cautious right at the start is not a good way of dealing with long term inflation.

It's been a while since I've dipped into here, and I know you're one of the more regular and respected posters. This isn't a challenge but genuine curiosity - do you have any figures to back up that assertion?

Linton

robatwork said:

Linton said:

This made great sense when people had to buy annuities as their entire pot would be spent at the start of retirement.  Now with most people using drawdown it is less of a good idea since they will be staying invested for perhaps 30 years.  Going cautious right at the start is not a good way of dealing with long term inflation.

It's been a while since I've dipped into here, and I know you're one of the more regular and respected posters. This isn't a challenge but genuine curiosity - do you have any figures to back up that assertion?

https://www.fca.org.uk/data/retirement-income-market-data
Actually most people take the whole pot as cash, which is a sort of extreme drawdown, but those are generally for very small pensions.  Very few people buy an annuity.

robatwork

Linton said:

https://www.fca.org.uk/data/retirement-income-market-data
Actually most people take the whole pot as cash, which is a sort of extreme drawdown, but those are generally for very small pensions.  Very few people buy an annuity.

Thanks Sir Charles (I know it's not quite Lytton but when I see your name I picture David Niven).

Very interesting and to me slightly surprising stats. I know annuities are a bit shocking rate-wise currently but it's a lot of people gambling they won't live all that long.

Albermarle

robatwork said:

Linton said:

https://www.fca.org.uk/data/retirement-income-market-data
Actually most people take the whole pot as cash, which is a sort of extreme drawdown, but those are generally for very small pensions.  Very few people buy an annuity.

Thanks Sir Charles (I know it's not quite Lytton but when I see your name I picture David Niven).

Very interesting and to me slightly surprising stats. I know annuities are a bit shocking rate-wise currently but it's a lot of people gambling they won't live all that long.

A properly managed drawdown is not seen as particularly risky, and with a bit of luck you will still have a reasonable amount left when you die .
Of course if you just take the cash and/or drawdown too quick then of course there will be problems .