Up until last year, the clear answer was with an increasing proportion of bonds as you approached retirement. However, that advice assumed that you would be buying an annuity on retirement therefore the rising proportion of bonds was aimed at stabilising your pension fund as you got closer to the point of purchasing the annuity.
All that changed last March when the chancellor announced that you would no longer be required to buy an annuity and could continue to manage your pension fund as you saw fit.
But, what does that mean in practice? Well, you don’t have the cliff-edge of an annuity purchase therefore you can carry on running the fund as you would have done ten or twenty years earlier. This means, that you can carry on largely in equities and, in principle, should let you have a rising income over the years that you are in retirement. On a related note, since the fund will go to your dependents, there isn’t the push to spend it all as there would otherwise have been and, of course, you wouldn’t want to run out of money either.
What you can do depends a lot on your circumstances and temperament. For example, if you’ve got the average pension fund of around £30,000 then you’re quite limited. That’s not really enough to allow you to take many risks and probably only really enough to act as a top-up to your old age pension which, in practical terms, means that you might well be best with an annuity. Move up to £300,000 (which a surprisingly large number of people will have) and it’s a whole different ball-game. For a start, that’s well above the minimum that a range of investment managers will take you on and it’s enough to allow you to move more into equities i.e. to take on a bit of risk.
What’s key though is to know what your attitude to investment risk is. Could you sleep at night if your pension fund dropped 30% for instance? Could you convince yourself that it wouldn’t matter if it did? (and it doesn’t – it’s the income that matters on a pension fund, not the capital value)
Copyright © 2004-2014 by Foreign Perspectives. All rights reserved.