De-risking

Bimbly

I have a DC pension pot in addition to two smaller defined benefit pensions and so I decided going all equities was fine. Recently, however, I've realised I'll need to rely on this pot heavily for the early years of retirement and I don't have same the same appetite for risk anymore. I'm likely to be retiring in 3 to 4 years. I'll then be taking it all out over as few years as possible, with an eye on tax efficiency.

It's an Aviva workplace pension which pays interest at the BoE base rate on the cash account. I'm struggling to see why I would move it out of that if I want relatively safe options. The select funds I have access to are a Sterling Liquidity (money markets) fund with 0.18% charge, the usual bond fund options, or I could go multi-asset low risk where they pick the percentages for you (but I'd rather not).

Neither bond funds nor money markets look attractive to me. I know recent performance can't be relied on, but I can't see I'd be gaining much potential return if I went into bonds/money markets. Bond funds also had that large dip a couple of years ago, which shows they're not risk free.

I'll be retiring at 60, unless redundancy happens before then (reasonable possibility). DB1 pays out from 60, DB2 at 65, and full state pension at 67. The pot is to fill in the gap. A mortgage up until age 75 is a large part of my expenditure (but I love my home; I'm not moving) and although inflation is a factor, mortgage costs should remain steady. 

I'm finding it harder and harder to keep going at work and my original thought of, well I can just work a bit longer if the markets aren't favourable, is not something I want to contemplate. So I need to be able to rely on this money being there.

SVaz

I’ve got 3 years in a short term money market fund for 2027+ and I’m about to set up 2 years in a Gilt ladder starting in 2030. 

It’s costing me £14k to get £9k + £9k and if interest rates ( for the coupons) are higher than 2% then I’ll have a bit more.    

QrizB

I've recently (the past week) reallocated a chunk of my DC pension (which was almost all in equities) and built a gilt ladder, aligned with my retirement plans. Scottish Widows lets me buy individual gilts, although it doesn't seem to include index-linked ones so I've built it with nominal gilts instead.

I'll need to reinvest coupons manually.

This is my current employer's scheme and new money is still going into equities.

artyboy

OP - if your primary objective is derisking, then what exactly do you dislike about short term money market funds? This is not a cake/eat it scenario - if you do want lower risk, then the trade off is lower returns.

There are some niche 'true SIPP' providers that will let you put your pension funds into mainstream cash savings products, complete with FSCS protection, if that is the level of de-risking you really want?

Bostonerimus1

You're going to have to give up potential return for the comparative safety of a money market fund or short term Gilts and bonds. So I'd put enough in those to fund your "gap years" or have a plan to use dividends from other investments or even see how using some money to buy an annuity might fit in with your income plans.

GazzaBloom

I at 58 this week and have an Aviva workplace pension as well and I retired at the end of 2024.

I hold cash inside the Aviva pension, and as you say, they pay BOE base rate interest, which is about as good as you can expect for a cash holding. This being the case there is no real advantage to buying the Blackrock Sterling Liquidity money market fund as it tracks SONIA which is typically just marginally below base rate. 

I was happily 100% equity index funds during accumulation but started to build a “risk-off” allocation in the final year prior to retirement and decided to keep it as cash after spending a lot of time looking at bonds. I concluded that bond funds are not for me so keep just cash and equity index funds.
I have cash that would cover 5 years of inflated living expenses and our first years drawdown is already taken so, in effect I could avoid selling down any equity funds for up to 6 years from now if the markets crash.

I still mull over bonds but as Aviva don't allow you to hold individual bonds/gilts only bonds funds, I would probably buy some of the Vanguard Bonds Index fund which you can get via the Aviva Fund Supermarket but haven't pulled the trigger yet.

I still feel happier with cash as risk off while it's earning 4.5% and anything I want to invest is put to work in equity index funds.

We have some inflation linked fixed income of £10.5K which covers 30% of our base living expenses and we are 9 years from getting full state pensions so knowing that I have cash that will cover 6 of those years if needed feels OK.

I had had an absolute gutful working as well so decided to get out. Life is too short and you're a long time dead. I doubt many people lie on their deathbed wishing they'd worked a couple of more years. Admittedly I'm only 2 months in to retirement and the markets wobbled through February as soon as I hade taken a lump out as drawdown but so far I have no regrets!

The markets can crash at anytime but that will always be true any time you decide to retire. I recommend having a plan for dealing with it and take the leap. Plans can always be adjusted, you could go back to a part time job for a year or two, reduce expenses, use a form of guardrails strategy, use the risk off cash, or a combination of all.

SteveBLFC64

Does anyone use funds similar to below as part of their method of de-risking - on the surface it almost appears to be too good to be true - yield of 7.58, low risk and fairly consistent growth over the past few years. I'm sure I'm missing something..... ?

Bimbly

Thanks for your replies.

@GazzaBloom describes a lot of my thoughts. Sounds like we are in a similar position.

@artyboy - it's not that I don't like short term money market funds, it's just that I don't see what advantage they have over being paid BoE base rate interest in the cash account.

I realise I'm going to have to give up returns for low risk - that's a given. I'm just wondering if there's something I'm missing. A small amount of risk is fine, but I can't see bond fonds offering a return above cash.

If I had four more years like this last year, then I'd be a lot more comfortable for money in retirement. But the risk is that a stock market shock puts retirement plans on hold (and I really need to stop work soon!). I was going to wait until the last year to move into cash, but I got jittery.

The plan is to retire in four years, unless redundancy happens in two years (end of a contract). I sailed through the 2020 Covid dip but, emotionally, I don't think I could weather a crash now. 

cfw1994

If you can’t emotionally weather a crash now, then drop a chunk of your funds into the MMF.  Sleep easier.

If markets drop 10%, buy back in with some of it.
If they drop another 10%, repeat.

🤷‍♂️

SVaz

I looked at a 5 year fixed term annuity but it seemed pretty terrible.
£45000 for £10k income x 5, not rising,
 single life ( which is no good to me) no guarantee and nothing back at the end,  starting in April 2027, age 61. 

That was the ‘best’ on a comparison site,  with Canada life.    

It would also mean me paying tax on £2k of it because it would be bought with a crystallised pot and I have a small DB pension. 

GazzaBloom

Bimbly said:

Thanks for your replies.

@GazzaBloom describes a lot of my thoughts. Sounds like we are in a similar position.

@artyboy - it's not that I don't like short term money market funds, it's just that I don't see what advantage they have over being paid BoE base rate interest in the cash account.

I realise I'm going to have to give up returns for low risk - that's a given. I'm just wondering if there's something I'm missing. A small amount of risk is fine, but I can't see bond fonds offering a return above cash.

If I had four more years like this last year, then I'd be a lot more comfortable for money in retirement. But the risk is that a stock market shock puts retirement plans on hold (and I really need to stop work soon!). I was going to wait until the last year to move into cash, but I got jittery.

The plan is to retire in four years, unless redundancy happens in two years (end of a contract). I sailed through the 2020 Covid dip but, emotionally, I don't think I could weather a crash now. 

Have you created a retirement cashflow model?

Knowing what our spend needs are in retirement stress tested against a range of market returns is what gave me the confidence to take the plunge.