Pension firms choose when to de-risk your money based on one’s expected retirement age, however, many savers are not keeping up to date with their pension schemes and have no clue how their money is being managed.
A survey by the wealth manager Interactive Investor found that 65 percent of over-55s did not know whether their money was being moved into less risky investments in the build-up to retirement.
An expert has explained that if people don’t ‘de-risk’ their portfolio at an appropriate time, they could shave thousands off their pensions for retirement.
By de-risking too early, pension savers can’t enjoy the full benefits of their investments.
Mark Powley from the consultancy Isio said: “At 50 it can be difficult to know when you plan to retire, but one of the most important things to get right is to make sure your pension scheme has your target retirement age so that de-risking begins at the appropriate time.
“Otherwise you won’t get the full benefits of the investment growth phase and will end up with less money than you were expecting.”
The standard approach to retirement planning has typically been to mainly invest in funds that invest in shares while ond is young.
Then as people get closer to retirement, they can gradually de-risk their portfolio by choosing funds that invest in a mixture of investments including bonds, as well as cash.
Isio analysed the performance of 13 pension schemes. It said that in the three years to October, growth funds generated average returns of about eight percent a year, while de-risked funds returned about three percent.
In 2019 the insurer Aviva estimated that a typical pension saver could expect £4,000 less in their pension at retirement age if their target date was set three years too early.
Alice Guy, Head of Pensions and Savings at interactive investor, says: “Lots of people are struggling to save properly for their futures, but some sections of society are particularly at risk of not having enough money in retirement.
“We can’t all control the amount of money we pay into our pensions, particularly when times are tough. But what we can control is risk, which can be fundamental to achieving retirement goals. If you don’t know your risk, you can’t plan.”
However there are other options people can consider to boost their income in retirement, such as an annuity.
Tom Selby at AJ Bell said that lifestyling and de risking strategies were outdated and worked best for customers who planned to buy an annuity with their pension pot when they retire.
Annuities are insurance products that pay a fixed income in exchange for a lump sum upfront and their prices are linked to the yield of long-term government bonds (gilts).
Figures from Hargreaves Lansdown show that a 65-year old with a £100,000 pension could get up to £7,144 each year compared to £5,940 a year ago on a five-year guaranteed single life, non-increasing income annuity.
Annuities look a lot more attractive now than they have over the last couple of years. However, many are concerned about locking into an annuity rate now and potentially missing out on higher rates in the future.
It should be noted that waiting for a higher annuity rate would also mean missing out on those income payments someone would get in the meantime.
It found that growth funds typically held 83 percent stocks and six percent bonds while de-risked funds were made up of 33 percent stocks and 42 percent bonds.
Isio said that someone on a starting salary of £25,000 at 22 who retired at 65 and saved eight percent into their pension throughout their career could expect to have £283,000 in their pot if they were de-risked 15 years before retirement.
If their money stayed in the growth fund, they would have £308,000. It assumed salary increases of two percent a year.
They found that moving away from equities too early can dampen one’s investment returns.
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