Reaching retirement? Don't take your foot off the pension risk pedal

'The words Retirement Plan written on a hand drawn bar chart surrounded by pencils, books and calculator.   Alternative version

Final salary pensions are what can only be described as the holy grail for retirees.

Generous pension income paid out based on your pay cheques until you die rather than eking out a miserable retirement based on the whims of the stock market throughout your working life; no wonder the former has a £150 billion collective black hole to fill.

You read it correctly: £150 billion. Currently final salary pension schemes, also known as defined benefit (DB) schemes, have assets of £1,133 billion (amount in the pension pot) but have liabilities (need to pay out) £1,283 billion, according to some clever maths by consultants at JLT Employee Benefits.

So how did we end up in such a precarious place? Well this shortfall has a lot to do with people living too long. When companies offered the DB package decades ago they didn't expect for their employees to live very long, but they did.

Unfortunately no-one could foresee such medical advances or increasing longevity but an ageing population isn't solely to blame.

DB pension trustees may not have needed to worry about investing the money wisely and trying to make a return when people were only living a few years in retirement but as retirement became decades long they should have been looking at growing the size of the pot to prevent a shortfall.

Instead, the money was invested in safe but low yielding investments like government bonds and JLT point out that despite the FTSE rising 52% since 2008, these schemes will not have benefitted. Any return they have achieved will be wiped out by inflation as DB pensions are inflation-linked.

These trustees have made a textbook pensions mistake, one that many approaching retirement make; they assume all their money should be in 'safe' assets.

Those who reach retirement and buy an annuity will have their income rate calculated based on the return of a very safe model of investment, too safe. Those who go into income drawdown lean towards safe investments. But why?

If you knew you had 20 or even 30 years to live you wouldn't put your money in cash or bonds that just cover you from the eroding effect of inflation, you'd split your money into safe and more risky asserts. Why would you do anything different when you reach retirement?

Investors need to be reconditioned and stop assuming that hitting retirement age means a taking their foot off the risk pedal.
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