Short-Term Drawdown Investment Risk

Dyesie

Been lurking here awhile and I'm amazed at the number of people taking their time to offer very informed insight to other peoples pension questions.  So here's my starter for 10.  Hoping its a simple one.  Im 57 and will finish work at least for now, at the end of March.   At 60 I can access my DB pension which is more than enough for me to survive on.  In the meantime (57-60years) I plan to use my Aviva DC pension, squander my tax free cash before drawdown on the remaining £120k over the the next 3 years.     

So my specific questions are. 
One; Over 3 year period you would not expect to take any investment risk, so would best practice be (1) to leave it all as cash and take the inflation hit or (2) invest in low risk fund and mitigate inflation and platform fees (0.4%) with minimal risk.     

Two; I know nothing about investment but Aviva offers a specific "investment pathway" fund aimed directly at people who plan to take out all their money within the next 5 years.  Sounds ideal and costs just 0.15%.  As you would guess its largely Treasury and Corporate Bonds but my crude economics suggest when interest rates are rising bond values are likely to fall.  This is making me cautious on what seemed a fairly simple plan.   Do I need financial advice on investment options for such a short time frame or am I over thinking this ?
 
Three; am I missing anything obvious.  

Thanks for taking the time to read this and welcome any views.  

bostonerimus

I retired at age 52 which was 3 years before I could access my DB pension. To bridge the gap I put 3 years spending in the bank as I like simplicity and my rule is that short term known spending should be funded from cash and 3 years qualifies as short term to me. I had $15k/year income from a rental property and calculated I needed another $15k/year to be comfortable so I started out with $45k in the bank. My tax bill was vastly reduced and I became officially "poor" as the state where I live in the US only considers the income you declare on your taxes and they started signing me up for benefits like free heating fuel allowance and subsidized healthcare. I also did a clean out of my spending and cut things like TV subscriptions. I ended the 3 years with $15k still in the bank.

So I would use the bank and bank saving accounts for your money to span the gap until the DB comes on line and to get the gains (especially with inflation picking up) look to reduce your spending. Also make sure you have hobbies and projects planned as the transition from work to retirement can be psychologically tricky.

tacpot12

I'm with bostonerimus on this question - for three years, I would use cash, not investments. I retired at 53 and used two years of cash savings to get me to the point at which I could start drawing down my DC pension. I have to wait another five years before I can get my first DB pension, so I have left the majority of my DC pension invested for the long term, but I still have about two years of living expenses in cash. (Half in my SIPP and half in bank accounts & Premium Bonds). My investments in my SIPP pay dividends and I can live off this natural yield without selling any investments. 

Premium bonds are an option for cash that you don't need until years 2 & 3.

Bimbly

Stick it in cash - why have the extra worry for the possibility of a small return?

My Aviva DC pot actually pays interest on the cash holding at the Bank of England base rate. Maybe yours does too? It won't beat inflation, but not nothing.

Take out as much as you can 25% tax free and up to the 40% tax bracket each year until depleted. Put this cash in savings or premium bonds and you'll earn a little bit of interest before you spend it. Again, won't beat inflation, but will be worth something.

Albermarle

2) invest in low risk fund and that might mitigate inflation and platform fees (0.4%) with minimal risk.     

I have made a small correction to your option 2 .

but Aviva offers a specific "investment pathway" fund aimed directly at people who plan to take out all their money within the next 5 years

Just FYI , most pension providers offer something very similar - it is a government initiative to offer four simple options to discourage people keeping their pension pots in cash for long periods .

Are you sure that you will spend all the pot over three years ? If there is a possibility that some may remain longer term, then maybe you could invest some of it to try and beat inflation over a longer period ( > 5 years ) 

Dyesie

Thanks guys for taking your time on this.   Think I will take note and leave it as cash. 

I suspect you are right to suggest spending levels will go down and I will have some left over.  Plan to dedicate some of my new found spare time to develop some basic investment knowledge !! One for another day.