Pension Risk Levels: What is Appropriate for Your Retirement?

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We all know that values go up and down and past performance is no guarantee for future returns; however, when it comes to our pension savings, for some, selecting a suitable risk strategy may not be such a straight forward decision. 

Pension savings represent a lifetime of hard work and, at retirement, become irreplaceable capital, as it is often not possible to go back to work and restart contributions again.

Whilst some of us may have a stable attitude towards risk and remain undeterred during market volatility, others will feel very uncomfortable at the idea of losses, especially with their pension savings.

As advisers, we must firstly assess an individual’s ability to take on risk (capacity) and their attitude towards risk, which are two separate concepts.  Put simply, capacity for risk is objective, it is a person’s ability to absorb a fall in their investment value which will not have a detrimental impact on their standard of living.  This can be crudely calculated by undertaking simple cashflow analysis of one’s financial circumstances, but this will represent only a snapshot in time and should be revisited regularly. 

Attitude to risk is, on the other hand, more psychological as it deals with how someone feels about investment risk, it is thus subjective by nature and may not align with a person’s ability to withstand financial losses.  Both are equally important, though the two concepts should be delineated and form a broader discussion when agreeing a suitable retirement investment strategy. 

Should I change my risk profile when I retire?

Whilst you may have spent 40 years building up your pension savings and wish to take a conservative approach to investing, it is equally important to remember that the funds will need to sustain your income requirement for a further 30-40 years.  Often individuals will look to reduce their exposure to risk at retirement, however lower risk = lower returns and a low risk portfolio may not hold the heavy lifting assets, such as equities, required to support long term growth and inflation protection.

Regular Reviews as a way to Reduce Uncertainty

It is often easier to establish a suitable risk profile when the objective is simply to accumulate as large a fund as possible and there are no access requirements; that said, although the objective is unlikely to change, reviews will still be necessary to ensure that it is on target to deliver at the nominated retirement age. 

We know that all investments carry some form of risk, though when it comes to drawing down from your pension there is an additional dimension to our thought process.  This is because withdrawing an income during a market downturn will have a negative impact on the fund, otherwise known as ‘sequency risk’ or ‘pound cost ravaging’. It means that it is harder for the fund to recover over time, as there is less capital to work with. 

The favoured approach to mitigating this risk is to invest in a multi asset portfolio which holds short, medium and long term assets.

When in drawdown, conversations should be held with your adviser regularly, to review what’s going in and out, how the fund has performed and revisiting long term sustainability projections.  Many factors should be considered; age, health, dependency liabilities, other investments/sources of income, and if you are still accumulating provision for your retirement years.          

Knowing your income and expenditure needs

It is critical to have a detailed understanding of income and expenditure needs in retirement, as the implications of investment losses may result in a reduction in income and lifestyle.

Income needs will also vary throughout the course of your retirement years; for example, more or less income may be required in the following situations:

  • Capital requirements to repay a loan or purchase a new car or holiday
  • A reduction in income due to another pension or state benefits coming into payment
  • Change in taxation threshold/rates, allowing for more or less income to be withdrawn
  • Change in pension legislation
  • Change in economic environment, such as inflation/interest rates
  • Health related needs/Long term care

In summary, there is no single capacity for loss or risk profile calculation, instead it is a combination of approaches, cashflow modelling and tracking asset adequacy over time that is required to ensure that your standard of living is maintained long term.


  • The content of this document is for information purposes only and should not be construed as financial advice
  • Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise
  • We always recommend that you seek professional regulated financial advice before investing