Pension warning as simple mistake could shave thousands off your retirement income | Personal Finance | Finance

Pension firms choose when to de-risk your money based on expected retirement age, but many savers are not keeping up to date with their pension schemes and have no understanding of how their money is being managed.

A survey by wealth manager Interactive Investor found that 65 per cent of over-55s did not know whether their money was being moved to less risky investments in the run-up to retirement.

An expert explained that if people don’t ‘de-risk’ their portfolios at the right time, they could end up taking thousands out of their retirement pensions.

By de-risking too early, pension savers cannot take full advantage of their investments.

Mark Powley of consultancy Isio said: “At 50 it can be difficult to know when you plan to retire, but one of the most important things to get right is to make sure your age retire at your pension scheme so that you are retiring. starts at the appropriate time.

“Otherwise you won’t get the full benefits of the investment growth phase and you’ll end up with less money than expected.”

The standard approach to retirement planning is to invest primarily in funds that invest in shares when young.

Then as people get closer to retirement, they can gradually de-risk their portfolio by choosing funds that invest in a mix of investments including bonds, as well as cash.

Isio analyzed the performance of 13 pension schemes. He said growth funds generated average returns of around 8 per cent a year in the three years to October, while de-risking funds returned around three per cent.

In 2019, insurer Aviva estimated that a typical pension saver could expect £4,000 less in their pension at retirement age if their target date was set three years too early.

Alice Guy, Head of Pensions and Savings at interactive investor, says: “Many people are struggling to save properly for their future, but some sections of society are particularly at risk of not having enough money in retirement.

“We can’t all control the amount of money we pay into our pensions, especially when times are tough. But what we can control is risk, which can be fundamental to achieving retirement goals achieve. If you don’t know what your risk is, you can’t plan.”

However there are other options that people can consider to increase their retirement income, such as an annuity.

Tom Selby at AJ Bell said lifestyle and de-risking strategies were outdated and worked best for customers who planned to buy an annuity with their pension pot in retirement.

Annuities are insurance products that pay a fixed income in exchange for an upfront lump sum and their prices are linked to the yield of long-term government bonds (maturity).

Figures from Hargreaves Lansdown show that a 65-year-old on a £100,000 pension could receive up to £7,144 each year compared with £5,940 a year ago on a five-year single life, non-increased income annuity.

Annuities look much more attractive now than they have in the last few years. However, many worry about locking into an annuity rate now and potentially missing out on higher rates in the future.

It should be noted that staying on a higher annuity rate would mean losing out on those income payments that one would have received in the meantime.

It found that growth funds typically had 83 percent stocks and six percent bonds while de-risking funds were made up of 33 percent stocks and 42 percent bonds.

Isio said someone on a starting salary of £25,000 at 22 who retired at 65 and saved 8 per cent into their pension over their career could expect to have £283,000 in their pot if they were de-risked 15 years before retirement .

If their money stayed in the growth fund they would have £308,000. He accepted salary increases of two percent a year.

They found that moving out of equities too early can hurt one’s investment returns.