Pension investment risk category dilemma

Loyalandtrue77

In the last year or so i’ve finally decided to set a goal of quitting my main career job at what will become the new private pension age of 57, and taking my pension. I’d continue to work, doing something more flexible. Freelance work maybe. It’s a good few years away yet (ten) and you never know what’s around the corner, but I think it makes sense to at least have a plan.

The dilemma I currently have is whether or not to inform my workplace pension of my intention or not. I can do this very easily online but i’m aware of the fact that this will likely trigger a change in the investment risk category, since i’d be within ten years of taking my pension. Higher risk, as it is now, could ‘potentially’ scupper my plans but low risk would slow growth at a time when I want to increase my pot as much as possible. A difficult four or five years in our industry back in 2015 coupled with a lack of focus on my pension has left me making up for lost time.

Any advice would be much appreciated, thanks.

tacpot12

I think you need to find out if changing your planned retirement date will change the risk category and hence change the funds you are invested in. You have to ask whether there is an option not to do this. Whether or not it is a good idea to allow them to chane the risk category depends on whether you want to buy an annuity when you retire, or have the option to draw down on the funds. If you are happy with an annuity, then, in theory, them changing the risk category should have no impact on your retirement income as the annuity will be better value if the funds in your pension have not grown as much. 

If you want to be able to draw down on your pension, you probably don't want to reduce the risk of your investments much as they still have to continue to grow for the next 30 years, but if you have a UK state pension then really you need the majority of your personal pension for the years between retiring and drawing your state pension, so de-risking the pension a bit might be a safer option. 

Is it possible that you will have more scope to put more into your pension in the years immeidately before retirement, e.g. because you will have paid of your mortgage or have children that will have graduated university? 

Marcon

Loyalandtrue77 said:

In the last year or so i’ve finally decided to set a goal of quitting my main career job at what will become the new private pension age of 57, and taking my pension. I’d continue to work, doing something more flexible. Freelance work maybe. It’s a good few years away yet (ten) and you never know what’s around the corner, but I think it makes sense to at least have a plan.

The dilemma I currently have is whether or not to inform my workplace pension of my intention or not. I can do this very easily online but i’m aware of the fact that this will likely trigger a change in the investment risk category, since i’d be within ten years of taking my pension. Higher risk, as it is now, could ‘potentially’ scupper my plans but low risk would slow growth at a time when I want to increase my pot as much as possible. A difficult four or five years in our industry back in 2015 coupled with a lack of focus on my pension has left me making up for lost time.

Any advice would be much appreciated, thanks.

Must you use a lifestyling option, which is what you're describing in your post? Are there alternatives?

Albermarle

Marcon said:

Loyalandtrue77 said:

In the last year or so i’ve finally decided to set a goal of quitting my main career job at what will become the new private pension age of 57, and taking my pension. I’d continue to work, doing something more flexible. Freelance work maybe. It’s a good few years away yet (ten) and you never know what’s around the corner, but I think it makes sense to at least have a plan.

The dilemma I currently have is whether or not to inform my workplace pension of my intention or not. I can do this very easily online but i’m aware of the fact that this will likely trigger a change in the investment risk category, since i’d be within ten years of taking my pension. Higher risk, as it is now, could ‘potentially’ scupper my plans but low risk would slow growth at a time when I want to increase my pot as much as possible. A difficult four or five years in our industry back in 2015 coupled with a lack of focus on my pension has left me making up for lost time.

Any advice would be much appreciated, thanks.

Must you use a lifestyling option, which is what you're describing in your post? Are there alternatives?

As above, one if my workplace pensions was in a lifestyling option. I just moved out of it and picked my own investments.
Nothing too complicated, just a simple multi asset fund.

Loyalandtrue77

Marcon said:

Loyalandtrue77 said:

In the last year or so i’ve finally decided to set a goal of quitting my main career job at what will become the new private pension age of 57, and taking my pension. I’d continue to work, doing something more flexible. Freelance work maybe. It’s a good few years away yet (ten) and you never know what’s around the corner, but I think it makes sense to at least have a plan.

The dilemma I currently have is whether or not to inform my workplace pension of my intention or not. I can do this very easily online but i’m aware of the fact that this will likely trigger a change in the investment risk category, since i’d be within ten years of taking my pension. Higher risk, as it is now, could ‘potentially’ scupper my plans but low risk would slow growth at a time when I want to increase my pot as much as possible. A difficult four or five years in our industry back in 2015 coupled with a lack of focus on my pension has left me making up for lost time.

Any advice would be much appreciated, thanks.

Must you use a lifestyling option, which is what you're describing in your post? Are there alternatives?

I wasn’t familiar with the term ‘lifestyling’ but have had a look around and have read the pros and cons. I’m not sure exactly, but can only recall being asked whether i’d like to stay in a medium risk investment or not. It’s something I need to look into asap and see what the options are. 

Hoenir

Loyalandtrue77 said:

Higher risk, as it is now, could ‘potentially’ scupper my plans but low risk would slow growth at a time when I want to increase my pot as much as possible. 

Investing in equities can see periods as long as 12 years between market highs, i.e. recovery after a correction. Volatility is one measurement of risk. Of which they are many. After some decades of tranquility. The world is becoming a less certain place once again. 

Loyalandtrue77

tacpot12 said:

I think you need to find out if changing your planned retirement date will change the risk category and hence change the funds you are invested in. You have to ask whether there is an option not to do this. Whether or not it is a good idea to allow them to chane the risk category depends on whether you want to buy an annuity when you retire, or have the option to draw down on the funds. If you are happy with an annuity, then, in theory, them changing the risk category should have no impact on your retirement income as the annuity will be better value if the funds in your pension have not grown as much. 

If you want to be able to draw down on your pension, you probably don't want to reduce the risk of your investments much as they still have to continue to grow for the next 30 years, but if you have a UK state pension then really you need the majority of your personal pension for the years between retiring and drawing your state pension, so de-risking the pension a bit might be a safer option. 

Is it possible that you will have more scope to put more into your pension in the years immeidately before retirement, e.g. because you will have paid of your mortgage or have children that will have graduated university? 

Thanks for this, it’s a lot to wrap my head around but everything helps. Yes, I need to start by talking to them and see what the options are. I am leaning towards an annuity, but still have a lot to learn on the subject before that decision is made. I’ve been able to significantly increase my monthly contribution as-well as making my first one off payment this year so i’m quite optimistic about having a good pot by that time. 

Loyalandtrue77

Hoenir said:

Loyalandtrue77 said:

Higher risk, as it is now, could ‘potentially’ scupper my plans but low risk would slow growth at a time when I want to increase my pot as much as possible. 

Investing in equities can see periods as long as 12 years between market highs, i.e. recovery after a correction. Volatility is one measurement of risk. Of which they are many. After some decades of tranquility. The world is becoming a less certain place once again. 

Yes, that’s true and one of the reasons why an annuity appeals to me, compared with spending decades managing a pension.

Albermarle

Loyalandtrue77 said:

Marcon said:

Loyalandtrue77 said:

In the last year or so i’ve finally decided to set a goal of quitting my main career job at what will become the new private pension age of 57, and taking my pension. I’d continue to work, doing something more flexible. Freelance work maybe. It’s a good few years away yet (ten) and you never know what’s around the corner, but I think it makes sense to at least have a plan.

The dilemma I currently have is whether or not to inform my workplace pension of my intention or not. I can do this very easily online but i’m aware of the fact that this will likely trigger a change in the investment risk category, since i’d be within ten years of taking my pension. Higher risk, as it is now, could ‘potentially’ scupper my plans but low risk would slow growth at a time when I want to increase my pot as much as possible. A difficult four or five years in our industry back in 2015 coupled with a lack of focus on my pension has left me making up for lost time.

Any advice would be much appreciated, thanks.

Must you use a lifestyling option, which is what you're describing in your post? Are there alternatives?

I wasn’t familiar with the term ‘lifestyling’ but have had a look around and have read the pros and cons. I’m not sure exactly, but can only recall being asked whether i’d like to stay in a medium risk investment or not. It’s something I need to look into asap and see what the options are. 

Normally when you first join a workplace pension, you will be asked what investments in the pension you want your money to be held in. If you do not make any choice ( and I think that covers nearly 99% of people) your money goes into a default fund.
This is typically medium risk, meaning it will be about 60% equities ( shares) and the rest mainly bonds/gilts.
However many pensions default is a so called Lifestyle fund. This means it starts off with a higher risk/higher growth strategy when you are younger ( say 75% equities), and then as you approach retirement age, it derisks by reducing the % of equities. 
If you do not tell the pension provider anything different they will have 65 in their system as your retirement date. You can change this online easily normally.
Of course you can retire when you like and you can start to take from the pension from 55/57, but this lifestyling option will work with the date in their system.
Also if you are looking to buy an annuity you need to check you are in an Annuity lifestyle fund, which will derisk completely, or in a  Lifestyle drawdown, which will only derisk to a point.

Marcon

Loyalandtrue77 said:

Any advice would be much appreciated, thanks.

Looking at your responses, finding out the facts and options for your scheme would be a pretty good starting point.

Then some basic reading such as https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/pension-investment-options-an-overview should give you more confidence about taking decisions.

Loyalandtrue77

Albermarle said:

Loyalandtrue77 said:

Marcon said:

Loyalandtrue77 said:

In the last year or so i’ve finally decided to set a goal of quitting my main career job at what will become the new private pension age of 57, and taking my pension. I’d continue to work, doing something more flexible. Freelance work maybe. It’s a good few years away yet (ten) and you never know what’s around the corner, but I think it makes sense to at least have a plan.

The dilemma I currently have is whether or not to inform my workplace pension of my intention or not. I can do this very easily online but i’m aware of the fact that this will likely trigger a change in the investment risk category, since i’d be within ten years of taking my pension. Higher risk, as it is now, could ‘potentially’ scupper my plans but low risk would slow growth at a time when I want to increase my pot as much as possible. A difficult four or five years in our industry back in 2015 coupled with a lack of focus on my pension has left me making up for lost time.

Any advice would be much appreciated, thanks.

Must you use a lifestyling option, which is what you're describing in your post? Are there alternatives?

I wasn’t familiar with the term ‘lifestyling’ but have had a look around and have read the pros and cons. I’m not sure exactly, but can only recall being asked whether i’d like to stay in a medium risk investment or not. It’s something I need to look into asap and see what the options are. 

Normally when you first join a workplace pension, you will be asked what investments in the pension you want your money to be held in. If you do not make any choice ( and I think that covers nearly 99% of people) your money goes into a default fund.
This is typically medium risk, meaning it will be about 60% equities ( shares) and the rest mainly bonds/gilts.
However many pensions default is a so called Lifestyle fund. This means it starts off with a higher risk/higher growth strategy when you are younger ( say 75% equities), and then as you approach retirement age, it derisks by reducing the % of equities. 
If you do not tell the pension provider anything different they will have 65 in their system as your retirement date. You can change this online easily normally.
Of course you can retire when you like and you can start to take from the pension from 55/57, but this lifestyling option will work with the date in their system.
Also if you are looking to buy an annuity you need to check you are in an Annuity lifestyle fund, which will derisk completely, or in a  Lifestyle drawdown, which will only derisk to a point.

Thanks for the info Albarmarle, that helps and explains a lot. I’m definitely in the 99% crowd, but now have the information to maybe make some important changes.