Question
I have a pension plan made up of several funds, a mixture of equity and bonds. I am in my late 50s and prefer to remain cautious in case the stock market crashes.
If you wanted to de-risk your own pension plan, how would you do this in your pension portfolio? ( You cannot just take out the money as cash).
What type of funds would you personally switch to yourself in today's market if you wanted to de-risk?Answer
It largely depends on the extent you wish to de-risk.
The 'safest' option is to move fully into cash, but as you'll likely earn very little interest your pension pot would most probably shrink in real terms as it won't keep pace with inflation.
Fixed interest, i.e. gilts and corporate bonds, tend to be the next choice if you're comfortable with some risk, but less than investing in stock markets. Of course, there are no guarantees and you could still lose money, but worth considering provided you invest at the safer end of the market (i.e. bonds issued by robust governments and blue chip companies).
If you plan to buy an annuity then gilts can also make sense from the point of view that insurers use gilts to back their annuities. If you invest in gilts now and the price plummets over the next 5 years your pension fund will drop in value, but this may be offset (to some extent) by higher annuity rates because the gilts used to back your annuity have become cheaper to buy.
You might also consider protected pension funds offered by the likes of MetLife. I'm not a big fan as the cost of protection tends to be quite high, but they can suit individuals who want to retain stock market exposure while limiting their downside. For more info see my answer to this http://www.candidmoney.com/askjustin/427/metlife-guaranteed-products-any-good previous question.
If I were around 7 years away from retiring (wishful thinking!), concerned by markets and planning to buy an annuity at retirement I'd probably hold about a quarter of the fund in cash, half in gilts/high quality corporate bonds and the balance split between equity income funds that invest in well established cash rich companies and absolute return funds that I think might actually stand a chance of working. As retirement approaches I'd probably shift the balance more towards cash and gilts. Were the stock market outlook not so uncertain I'd probably start with less in cash and more in equity income and absolute return funds.
Another option might be for your keep your pension invested post retirement and draw an income instead of buying an annuity. In this case you can probably adopt a longer investment horizon which might leave you feeling more comfortable with a less cautious investment strategy.
Please bear in mind I can't provide advice to your specific situation, but hopefully the above general pointers will prove helpful.
I have a pension plan made up of several funds, a mixture of equity and bonds. I am in my late 50s and prefer to remain cautious in case the stock market crashes.
If you wanted to de-risk your own pension plan, how would you do this in your pension portfolio? ( You cannot just take out the money as cash).
What type of funds would you personally switch to yourself in today's market if you wanted to de-risk?Answer
It largely depends on the extent you wish to de-risk.
The 'safest' option is to move fully into cash, but as you'll likely earn very little interest your pension pot would most probably shrink in real terms as it won't keep pace with inflation.
Fixed interest, i.e. gilts and corporate bonds, tend to be the next choice if you're comfortable with some risk, but less than investing in stock markets. Of course, there are no guarantees and you could still lose money, but worth considering provided you invest at the safer end of the market (i.e. bonds issued by robust governments and blue chip companies).
If you plan to buy an annuity then gilts can also make sense from the point of view that insurers use gilts to back their annuities. If you invest in gilts now and the price plummets over the next 5 years your pension fund will drop in value, but this may be offset (to some extent) by higher annuity rates because the gilts used to back your annuity have become cheaper to buy.
You might also consider protected pension funds offered by the likes of MetLife. I'm not a big fan as the cost of protection tends to be quite high, but they can suit individuals who want to retain stock market exposure while limiting their downside. For more info see my answer to this http://www.candidmoney.com/askjustin/427/metlife-guaranteed-products-any-good previous question.
If I were around 7 years away from retiring (wishful thinking!), concerned by markets and planning to buy an annuity at retirement I'd probably hold about a quarter of the fund in cash, half in gilts/high quality corporate bonds and the balance split between equity income funds that invest in well established cash rich companies and absolute return funds that I think might actually stand a chance of working. As retirement approaches I'd probably shift the balance more towards cash and gilts. Were the stock market outlook not so uncertain I'd probably start with less in cash and more in equity income and absolute return funds.
Another option might be for your keep your pension invested post retirement and draw an income instead of buying an annuity. In this case you can probably adopt a longer investment horizon which might leave you feeling more comfortable with a less cautious investment strategy.
Please bear in mind I can't provide advice to your specific situation, but hopefully the above general pointers will prove helpful.
Read this Q and A at http://www.candidmoney.com/askjustin/829/how-to-invest-my-pension-when-approaching-retirement
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