Predictions for pensions 2025- million dollar question

Richardbajor

Thanks for all the responses- all appreciated and none were bad advice.  Too many to address individually but I am leaning now towards going safe based on the replies.  Also a good point about how annuities can go up and down at the point you want to take it in 18 months time- not sure if there is a correlation on this (ie stock market does bad then annuities do bad as well)?

I also liked the suggestion of going half way- my only problem being I don't know what that would mean in terms of risk- so instead of 7 years to retirement I could do 3 years (taking in 18 months) rather than just 18 months. I have to assume the pension company has hard and fast rules for this that match your retirement date.  If anyone knows how safe pension companies generally go as you reach the last 5 years to retirement age that would be good information.

Someone asked what would be my reaction if it went down. I'd be willing to "gamble" on it going down 2 or 3% against the, arguably, more likely outcome that it went up more than 1.5% (and as I said that 1.5% isn't a guarantee just what it has averaged). Would not want a "gamble" if it could go down 10-20% and take several years to recover. I do have the option to not take the annuity and use savings for a couple of years and even a little bit of drawdown waiting for a recovery so maybe this lessons the risk a bit compared to a fixed cut off and having to take the annuity.

Also worth pointing out that although everyone is talking about stock market I imagine the pension fund is likely to be invested in bonds and other assets as well- just geared more towards the stock market the further away from retirement you are.

I don't think anyone has responded to my query about whether the situation today in the stock market is below average trends and, all things being equal, ought to improve next year or if we are just about at a new normal.

JoeCrystal

Richardbajor said:

I don't think anyone has responded to my query about whether the situation today in the stock market is below average trends and, all things being equal, ought to improve next year or if we are just about at a new normal.

That requires a crystal ball, which no one has... 

Cus

I assumed one would choose a bond fund (including mmf) with a suitable average maturity in line with the timing of the annuity purchase.  But worth highlighting thanks 

arthur_fowler

Richardbajor said:

I also liked the suggestion of going half way- my only problem being I don't know what that would mean in terms of risk- so instead of 7 years to retirement I could do 3 years (taking in 18 months) rather than just 18 months. I have to assume the pension company has hard and fast rules for this that match your retirement date.  If anyone knows how safe pension companies generally go as you reach the last 5 years to retirement age that would be good information.

The detail of what your pot is invested in as you approach retirement will be readily available from your pension provider. Do you have online access to it? Or scheme literature? 

DRS1

Would it be right to assume that you are not going to spend your whole pension pot on the annuity but will take 25% as a tax free lump sum and spend the remaining 75% on the annuity?
If so then you should think about moving towards 75% gilts and 25% cash or cash equivalent.
Forget about the stock market - that is a mismatch to what you are going to be buying.  Yes you might win by staying in equities but you might lose and three years is not enough time to claw it back really.
Or as Clint Eastwood might put it "Do you feel lucky?  Well do you?"

QrizB

DRS1 said:

Forget about the stock market - that is a mismatch to what you are going to be buying.  Yes you might win by staying in equities but you might lose and three years is not enough time to claw it back really.
Or as Clint Eastwood might put it "Do you feel lucky?  Well do you?"

And then there's the famous quote "the market can remain irrational for longer than you can remain solvent":

https://quoteinvestigator.com/2011/08/09/remain-solvent/

Hoenir

Richardbajor said:

I don't think anyone has responded to my query about whether the situation today in the stock market is below average trends and, all things being equal, ought to improve next year or if we are just about at a new normal.

Bottom line is that the "stock market" is not in a parallel universe to the real world.  There's a vast difference between speculating by trading numbers on a screen and companies meeting the expectations of future profitability / cash generation placed on them by investors in the years ahead. Broad corrections occur when expectations fail to materialise from the majority.  Financial folly has existed for centuries. Will continue to exist long after we are gone. Human nature being what it is. 

incus432

Richardbajor said:

 Also a good point about how annuities can go up and down at the point you want to take it in 18 months time- not sure if there is a correlation on this (ie stock market does bad then annuities do bad as well)?

Annuity rates are closely linked to the 15 year gilt (UK govt bonds) yields. In general as investors worry about equities they 'flee to safety' and gilts, so bond prices rise and yields fall.  Eg when there were fears of a Covid recession and a no-deal Brexit, yields hit an all time low of 0.162% in March 2020.  

For the future it depends where you think interest rates will go. Will inflation rise or fall? 

Secret2ndAccount

Richardbajor said:

I'd be willing to "gamble" on it going down 2 or 3% against the, arguably, more likely outcome that it went up more than 1.5% (and as I said that 1.5% isn't a guarantee just what it has averaged). Would not want a "gamble" if it could go down 10-20% and take several years to recover. 

You should work on the basis that any equity investment (or equity portion of a mixed investment) could go down 30% tomorrow. If you are only happy to accept 3% loss then equities are not an option since a 3% drop can happen on any normal day.
Is there a money market fund available in your pension? They are currently paying about 4.5%. Would be fine to hang out in that for 18 months.

d6fs1l

Richardbajor said:

Someone asked what would be my reaction if it went down. I'd be willing to "gamble" on it going down 2 or 3% against the, arguably, more likely outcome that it went up more than 1.5% (and as I said that 1.5% isn't a guarantee just what it has averaged). Would not want a "gamble" if it could go down 10-20% and take several years to recover.

If you mean that you do not want to risk your pension falling in value by more than 3% over 18 months, then you should think carefully about whether you want to be invested in equities to any great extent. (Have a look, for example, at the S&P500 between 2000 and 2012 -- this is a very crude approach as it ignores dividends and currency movements, but it makes the point that indexes do not always recover quickly.)