Changing pension fund to High risk?

muffinek

Hello

I am 39 with sadly a very small pot for my pension. I am with Aviva and current fund is medium risk. 

I was looking into their forecast and it looks like it is no brainer to move my fund to High risk. Based on the estimates lower end of High risk is still slightly higher than upper end of medium risk. Am I missing anything here?

JohnWinder

I think that for someone your age it would commonly be a no brainer, as you say; but you do need to consider your own circumstances eg likely to lose your job forever in 5 years, or something else uncommon but bad for folk in your age bracket.

Those projections can be useful to guide your planning and contributions, but don't let them have undue weight in your decision making as it might tempt you to take on risk you're not able to deal with.

So give some similarly quantitative thought to the risk side of it, particularly monthly or yearly valuation fluctuations (if you're going to look at them), and how much the valuations can fall in a financial crisis eg GFC and how long they take to recover. You might also want to review whether you're invested in decent option(s), such as broadly diversified equities/bonds in low cost funds that pretty much track decent indexes.

TVAS

Attitude to risk is about 2 things capacity for risk and a willingness to accept risk. You have the latter. I have no idea if you have the former as you have not provided a summary of your TOTAL assets.

In my opinion only EXCEPTIONAL customers can take high risk.

An exceptional customer is someone who earns well above national average earnings 100k plus, is highly educated, is in a senior manager/director position or a business owner several car dealerships rather than one corner shop. As a result of said person having a large business portfolio he is use to seeking and paying for professional advice other than the company accountant. An exceptional customer will have large pension and non pension assets which means if said persons has a high risk investment strategy with a substantial part of his assets let's say a large pension fund of 500k, if it all goes tits up at the point benefits will be taken, that person has reliance on other assets, meaning they will not starve in the streets.

So the question is are you an exceptional customer? If you are you can take high risk. 

You also have to realise that within a medium risk fund you have high medium/ medium/medium and low/medium. 

It all depends on how much equities proportion in said medium fund so a medium risk fund with 80% equities is higher in risk than a medium risk fund that has 20% equities. 

You have time on your hands at age 39 so I reckon 20 years is sufficient time to be able to ride the fluctuations of the stock market. 

I reviewed a case where this man had a pension fund worth 4 million and he wanted to transfer from his final salary scheme to a money purchase scheme and pursue a high risk strategy. The pension at retirement would be 75k p.a. at retirement. However he was a Hedge Fund manager, who was worth 45 million in total. So if ALL the pension fund was lost, he would not be starving in the street. This man is an exceptional customer because of his assets and the fact as a Hedge Fund manager who understands the risk he is taking.

dunstonh

Disappointing that Aviva is using the word "forecast" in their projections.  A forecast is something that is likely to happen.   Projections are statistically more likely to be wrong than right.

ErinGoBrath

dunstonh said:

Disappointing that Aviva is using the word "forecast" in their projections.  A forecast is something that is likely to happen.   Projections are statistically more likely to be wrong than right.

A forecast is not necessarily something that is likely to happen, e.g. weather forecast.

In Aviva's case the "forecast" range is extremely wide though!

JohnWinder

TVAS said:

You have time on your hands at age 39 so I reckon 20 years is sufficient time to be able to ride the fluctuations of the stock market. 

Good point. But let's not overlook that in 20 years time, at age 59, there might be another 25 years of investing if one is to live to 84. For most people investing, it won't end at retirement; that's when it starts getting really serious.

Albermarle

Even what is classed as high risk , is open to debate/interpretation .

Many regular posters on here do not consider 100% equity global tracker funds as particularly high risk , as it is a diversified mainstream investment. Volatile yes but high risk in the long term ? Depends on your view .

I suppose though that the large majority agree that unregulated investments , individual shares etc as very high risk because there is a real risk of total loss. 

Malthusian

TVAS said:

In my opinion only EXCEPTIONAL customers can take high risk.

An exceptional customer is someone who earns well above national average earnings 100k plus, is highly educated, is in a senior manager/director position or a business owner several car dealerships rather than one corner shop. As a result of said person having a large business portfolio he is use to seeking and paying for professional advice other than the company accountant. An exceptional customer will have large pension and non pension assets which means if said persons has a high risk investment strategy with a substantial part of his assets let's say a large pension fund of 500k, if it all goes tits up at the point benefits will be taken, that person has reliance on other assets, meaning they will not starve in the streets.

I would agree with you if we were defining "high risk" as investments such as AIM shares, EIS, and other esoteric investments with a material chance of permanent and/or total loss.

The OP however may be looking at a workplace pension where "high risk" means a globally diversified pension fund that will go up and down a bit more than their existing fund already would. (We haven't been told what kind of investment Aviva mean by "high risk".)

TVAS said:

I reviewed a case where this man had a pension fund worth 4 million and he wanted to transfer from his final salary scheme to a money purchase scheme and pursue a high risk strategy. The pension at retirement would be 75k p.a. at retirement. However he was a Hedge Fund manager, who was worth 45 million in total. So if ALL the pension fund was lost, he would not be starving in the street.

He would if his £45 million was in esoteric investments and he lost them along with the formerly final salary pension. He wouldn't exactly be the first hedge fund manager to lose £45 million.

That's a minor quibble as a £4 million CETV for a 75kpa pension is verging on no-brainer territory, especially if you have £45 million in non-pension assets and having that money lost on death (+ death of spouse) is unlikely to make any sense.

bostonerimus

OP, yes I think you are missing something...extra volatility and RISK. Do you need to take on that extra risk. If you need a larger ending pot the most certain way to get it is to contribute more to your pension. So I would do some planning and look at your assets and spending and project how much you will need in your pot to support you in retirement. Then take on the minimum risk to get to that amount. So do a budget.

Investing for retirement does not mean taking on maximum risk in the hope that you'll get a bigger pot, you should look at it as taking the minimum risk to reach size of pot that you need.

Steve182

Perception of risk differs significantly from person to person.

I would consider high risk as investing in startup companies, which I don't partake in.

Others might consider the stock market as high risk.

I'm happy to invest in FAANG'S (or perhaps FAANGT's these days), Scottish Mortgage, small caps, micro caps, companies in dubious countries etc  etc. It's not high risk to me so long as it's reasonably well diversified...

The long term return is all I'm interested in. I can tolerate a few small disappointments on the way.

Thrugelmir

Albermarle said:

Many regular posters on here do not consider 100% equity global tracker funds as particularly high risk , as it is a diversified mainstream investment. Volatile yes but high risk in the long term ? Depends on your view .

It's become greed and FOMO.  Safety with the herd.