Cornwall LivingIssue #77

Avoiding hidden dangers in retirement

A recent report[1] identified that many savers in retirement are either taking ‘too little’ risk or taking ‘the wrong sort’ of risk. Each approach increases the danger of either running out of money during retirement or having to face reduced standards of living.

How can you take too little risk?

An example of taking ‘too little’ risk is taking your tax-free cash at retirement and investing the rest in an ultra-low-risk investment such as a Cash ISA. The report points out that ‘investing in retirement is still long-term investing’ and shows that decades of low-return saving can seriously damage the living standards of retirees. It highlights the case of someone who retired ten years ago with an illustrative pension pot of £100,000 which they invested in cash. Assuming they withdrew money at £7,500 per year (in line with annuity rates at the time), they would now be down to £27,000 and likely to run out, less than fifteen years into retirement.

The reckless retiree – what is ‘the wrong sort’ of risk?

In an era of low interest rates, some retired people may be tempted to seek out more unusual forms of investment with apparently high rates of return but accompanied by much greater risk to their capital. Examples could include peer-to-peer lending, investment in aircraft leasing or even crypto currencies such as bitcoin. Concentrated exposure to a single, potentially volatile investment can produce very poor outcomes, particularly if bad returns come early in retirement.

The rational retiree – what is the best way to handle risk in retirement?

Rather than invest in an ultra-low-risk way or chase individual high-risk investments, the report identifies a ‘third way’ of spreading risk across a range of assets, including company shares, bonds and property, both at home and abroad. This multi-asset approach can be expected to provide better returns over retirement than cautious investing in cash but also helps to smooth the ups and downs of individual investments.

Pension freedoms open up new possibilities for people in retirement, but they create new dangers as well. There is the danger of being too cautious and not making your money work hard enough. There is also the danger of taking the wrong sort of risk, seeking high returns but putting your capital at risk. Spreading money across a range of assets, in different markets at home and abroad is likely to deliver better returns, without exposing you to the capital risks that can come from chasing more risky investment types.

By understanding your retirement plans, Harris Begley can help ensure your expectations are fulfilled by establishing tailored plans to preserve your capital, produce income and pass on wealth securely and efficiently. If you would like to review your current planning provision, please contact financial advisors Matt Begley or Steve Rusga.


Source data:

[1] Research report published
13 January 2018 by 
mutual insurer Royal London

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. Harris Begley cannot accept responsibility for any loss as a result of acts or omissions.

These investments do not include the same security of capital which is afforded with a deposit account. You may get back less than the amount invested.

The value of pensions and investments and the income they produce can fall as well as rise. You may get  back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.