Pensions Week: Step 3 – Is Your Pension Taking the Right Level of Risk?

Hopefully, you are already starting to feel more in control of your pension. That feeling can translate into hundreds of thousands of pounds with the right steps, so let’s get on with Step 3.

People often confuse risk with being brave or cautious.

But risk is usually about how your pension is invested and whether that aligns with how long you have before you need to access it.

We’ve built a super quick risk quiz that will take you less than a minute.

A simple way to view risk is:

• Higher risk usually means more invested in shares.
• Lower risk usually means more invested in bonds and cash.

Higher risk can mean:

• Bigger ups
• Bigger downs

Lower risk can mean:

• Smoother journey
• Slower long-term growth

The more time you have until you retire, the more volatility you can usually afford, as you have time to ride out the ups and downs of the market. But when you get close to retirement, you should look to smooth out that volatility.

Crucially, being too cautious too early can cost you in growth. Low growth can leave your pension susceptible to losses as a result of inflation.

Being low risk isn’t necessarily safe.

Why you might be in the wrong fund for your risk profile

Many workplace pension schemes will automatically place you in a default fund using ‘lifestyle’ strategies. These will automatically move you into funds that invest more in bonds as you near retirement. And that can make sense if you plan to use your pension pot to buy an annuity.
However, if you plan to stay invested and draw your income gradually, de-risking too early can mean you miss out on years of growth. This is why it’s always worth checking that your fund matches your risk profile.

What not to do

• Don’t make the following mistakes with your pension:
• Don’t switch 100% to shares because markets are rising
• Don’t move everything into bonds because markets are falling
• Don’t copy someone else’s allocation
• Don’t assume higher historical returns will mean higher future returns

What should you do if our tool suggests you are not in the right risk alignment?

• Confirm your retirement age setting in your pension
• Review whether you are in a Lifestyle strategy
• Check what alternative funds exist within your scheme
• Ask your provider the question below:

“Can you confirm whether my current fund aligns with my selected retirement age and access plan, and what alternative options are available?”

You don’t need to redesign your entire pension today. The first part is about understanding whether it matches your timeline.

Your pension should be as individual as you are.

Remember to head to step 4 in our 30-second pension series.

This content is for educational purposes only and does not constitute personal financial advice. Always consider your own circumstances before making changes to your pension, and seek regulated advice if unsure.