If you find yourself grappling with financial worries, dilemmas, or uncertainties, reach out to Jessie Hewitson, a seasoned money journalist and editor who has now taken on the role of financial agony aunt for The i Paper. Jessie is here to tackle your burning questions while consulting with top-tier experts in the field, many of whom typically charge substantial fees for their advice. She combines this professional insight with her own life experiences, including times when she hasn’t always made the most prudent financial choices. Feel free to send your queries to [email protected], making sure to include “Ask Jessie” in the subject line, and she will get started.
Giles, a reader, asks…
I contribute 14 percent of my salary to my pension, along with an additional £55 each month, and my total has reached approximately £223,000. However, I’ve noticed that the amount seems stagnant and isn’t increasing much. I suspect my pension may have been “de-risked.” Upon retirement, in addition to my current job’s pension, I will receive a modest NHS pension that pays around £80 monthly, and I own a rental apartment generating £900 a month. Is there anything else I should consider doing? I am 59 years old, married, and have a son. My mortgage is set to be paid off in two years.
Jessie responds…
Thank you for sharing the details of your pension situation. I reached out to Sir Steve Webb, who formerly served as the pensions minister during the coalition government and is now a partner at LCP, a well-respected pensions consultancy. He quickly assessed your pension and identified why it seems static. You are correct; your pension has indeed been de-risked, but this transition occurred much earlier than usual—18 years before your retirement age, to be precise. Sir Webb describes this as an “unusually cautious” strategy, as most individuals are typically de-risked about ten years prior to retirement.
De-risking involves shifting workplace pension funds away from higher-risk assets like stocks and shares towards safer alternatives such as government bonds and cash. This is done as individuals approach retirement to safeguard against the potential of losing a significant portion of their pension value in the event of a stock market downturn.
Your company’s pension policy initiated this de-risking process when you turned 48, assuming a standard retirement age of 65; ordinarily, this would have commenced around age 55. While this approach ensures the safety of your funds, it may have caused you to miss out on potential growth opportunities.
I also consulted with an expert in the pensions and bonds sector, who shared that your pension plan’s early de-risking is indeed unusual, yet it reflects a broader trend in the industry. Recent volatility in bond markets—triggered by events like the mini-Budget, the COVID-19 pandemic, and the Ukraine invasion—has led fund managers to be more cautious. The fear of large market drops is still fresh, prompting a shift in strategy where pension funds are now more inclined to make adjustments sooner rather than later. As one expert eloquently stated, “People generally don’t get sacked for being too cautious.”
Now, regarding what steps to take moving forward—it largely depends on your retirement plans and timeline. If you’re considering purchasing an annuity—where you transfer your pension pot to an insurer in exchange for a guaranteed yearly income for life—staying put may be the best strategy. However, if you plan to remain invested in the stock market for less than seven years, you may face risks related to market fluctuations.
The more popular alternative is a drawdown strategy, enabling you to keep some of your funds invested while withdrawing a portion for living expenses. In this case, the urgency to de-risk is diminished since you remain active in the stock market. If you choose this path, financial adviser Justin Modray from Candid Financial Advice recommends transitioning your pension funds to a vehicle like the Fidelity Diversified Fund, which offers a balanced mix of stock market exposure for growth, along with bonds and cash to mitigate volatility. This strategy could serve you well during your drawdown phase unless you decide to switch to an annuity later on.
Overall, Mr. Modray’s assessment of your situation is optimistic. With your mortgage due to be cleared in a couple of years, the rental income will provide a solid foundation for your financial stability during retirement, complemented by your main pension, NHS pension, and eventual state pension.
While you continue working, it’s advisable to maintain your current pension contributions. Once your mortgage is settled, consider channeling any additional disposable income into your pension or an ISA. Although ISAs do not provide tax relief on contributions like pensions do, they offer the advantage of tax-free income when withdrawn in the future.
Rest assured, though your early de-risking may seem concerning, it was not an abrupt transition. You were not immediately shifted from equities to bonds overnight. However, it’s crucial to remain vigilant, as many of us have not saved adequately for retirement—myself included—so balancing caution with growth potential is essential for financial security.
