Pension Funds and De-Risking

Steve_s1

Hi all,

I'm 2 years away from taking (early) retirement and seeking advice.

I recently informed my company pension provider (Scottish Widows) that I wished to bring forward my retirement. As a result, they immediately moved 20% (£80k) of my portfolio from (moderate risk) global equities / index tracking funds to a (low risk) bonds fund, and the remaining 80% to a (low - moderate risk) index tracking fund. They also informed me that they would continue to switch my funds on a monthly basis to low risk funds (no indication of how much / by when). I calculated that in the last 2 weeks since this switch I've missed out on >£10k of growth, had the portfolio remained as it was, due to the small bounce in the markets. I've informed SW not to continue this monthly switch until further notice.

According to YouTube (Chris Bourne), de-risking is a bad idea and a good draw-down strategy should only have around 2 years worth of cash or bonds (say £40k), with the balance invested where it can continue to grow. This seems sensible to me. I'm not sure what the Scottish Widows strategy is, since I've been unable to speak to anyone knowledgeable so far. I'm thinking of transferring to a SIPP, maybe with Hargreaves Lansdown, where I have an ISA. 

Appreciate any feedback.
Thanks
Steve

tacpot12

De-risking is a really bad idea unless you are going to buy an annuity in the near future, or you don't have long to live. The rest of us need to take a reasonable amount of risk to ensure that our pension pots keep pace with inflation. (Chris Bourne is right.) There is no need to switch providers if you are happy with the investment performance of the Scottish Widows funds that you are invested in. I would switch everything back to the funds you had them invested in. 

Steve_s1

Thanks. Knowing my luck I'll switch funds just as the markets take another dive, but I guess it's about "time in the market, not timing the market", right! 

jim8888

Trying to predict the markets is why (in my 1st year of retirement) I took out 3 year's worth of annual expenses in cash. My intention is each year to cash in another year's worth of expenses so that I'll always have a 3 year cash buffer if the markets tank. The rest of my SIPP is in a Vanguard 80/20 LS fund. It took me ages to decide on this approach. It's not without risk, but so far I'm as comfortable with it as I think I could be with any other. 

QrizB

Steve_s1 said:

I recently informed my company pension provider (Scottish Widows) that I wished to bring forward my retirement. As a result, they immediately moved 20% (£80k) of my portfolio from (moderate risk) global equities / index tracking funds to a (low risk) bonds fund, and the remaining 80% to a (low - moderate risk) index tracking fund. They also informed me that they would continue to switch my funds on a monthly basis to low risk funds (no indication of how much / by when).

Is this because you're still in your scheme's default Lifestyle plan, which assumes you're going to buy an annuity? Could you change the plan to better reflect your intended retirement (which I guess is drawdown)?

Thrugelmir

Global equities might be moderate risk but are most certainly highly volatile. 

dunstonh

According to YouTube (Chris Bourne), de-risking is a bad idea and a good draw-down strategy should only have around 2 years worth of cash or bonds (say £40k)

The problem with quoting YouTubers is lack of context.   It can be very good idea to reduce risk as you get closer to retirement.  Indeed, most people are lower risk in the income years compared to the accumulation years.   Staying high risk can cause far more damage.   But without knowing the initial risk level and the level it is being moved to, it is impossible to say if its good or bad.

And telling you how much cash you should hold without knowing your future needs is also very foolish.

Steve_s1

QrizB said:

Steve_s1 said:

I recently informed my company pension provider (Scottish Widows) that I wished to bring forward my retirement. As a result, they immediately moved 20% (£80k) of my portfolio from (moderate risk) global equities / index tracking funds to a (low risk) bonds fund, and the remaining 80% to a (low - moderate risk) index tracking fund. They also informed me that they would continue to switch my funds on a monthly basis to low risk funds (no indication of how much / by when).

Is this because you're still in your scheme's default Lifestyle plan, which assumes you're going to buy an annuity? Could you change the plan to better reflect your intended retirement (which I guess is drawdown)?

Ah, yes. The literature they sent through mentioned Lifestyle plan, but no explanation what this is. I didn’t think people bought annuities much these days. Thanks for this.

Workerdrone

tacpot12 said:

De-risking is a really bad idea unless you are going to buy an annuity in the near future, or you don't have long to live. The rest of us need to take a reasonable amount of risk to ensure that our pension pots keep pace with inflation. (Chris Bourne is right.) There is no need to switch providers if you are happy with the investment performance of the Scottish Widows funds that you are invested in. I would switch everything back to the funds you had them invested in. 

Well for a more nuanced approach, I wouldn't say derisking per se was a bad idea. My stuff in accumulation is presently risk factor 6-7 on Standard life platform. So a lot of tech stuff and fairly volatile. The past few months have been a rollercoaster. I also track the Standard life managed 50:50 portfolio for comparison which was one of the offered selections when I took out the plan before I got into selecting my own funds. Thats down around 2% whereas some of my other riskier fund are down 20%+ If I'd stuck with that fund I wouldn't be down as much right now, but also wouldn't have seen the same returns.

TLDR. I wouldn't want to be in the riskier stuff in drawdown so don't knock the notion of dialling down the risk a bit.

tiring33

Sounds like you have the Lifestyling option activated on your pension, which I believe is the default on most Scottish Widows pension plans. You can ask them to turn this off if you want to have more control over what funds you buy and the equity/bond allocation. I have a Scottish Widows pension and did this some years ago.

Just give them a call and ask them to switch it off, you can then stick with the funds you have, or tell them which funds you want to move the invstment too in order to give you the risk profile you feel comfortable with. With the Lifestyling option turned off it will then remain static until/unless you change it.

zagfles

jim8888 said:

Trying to predict the markets is why (in my 1st year of retirement) I took out 3 year's worth of annual expenses in cash. My intention is each year to cash in another year's worth of expenses so that I'll always have a 3 year cash buffer if the markets tank. The rest of my SIPP is in a Vanguard 80/20 LS fund. It took me ages to decide on this approach. It's not without risk, but so far I'm as comfortable with it as I think I could be with any other. 

The thing about this sort of "cash buffer" approach is you have to make short term market timing decisions as to when to use it. What does "tanking" mean? For instance, what would you have do if the markets behaved as from 2000 onwards? Between 2000 and 2003 they mostly "tanked", so would you have spent the cash buffer over those 3 years? If you had, you'd have run out in 2003, at a market low, and be forced to sell equities in a massive dip. Similar story if you started in 2007. It works fine if the dip is very short term like the 2020 COVID dip, but many aren't.

Personally I'm looking at a more structured approach like Prime Harvesting, discussed here recently, it's a similar principle but more structured (ie based on rules rather that subjective assessments) and a much longer term approach.