As you near retirement, it is important to consider if you are potentially exposing your pension to a higher degree of risk because your funds are almost entirely still invested in higher risk asset investments.

The problem can arise when people in company and personal pension plans give a retirement age of 65 when they sign up to pension schemes, and then retire well before that age.

The Government's pension watchdog, the Pensions Advisory Service (TPAS), recently expressed concern that some pension savers did not fully understand the level of risk they are taking with their retirement funds by being heavily invested in equities right up to the date they intend to retire.

The majority of pension plans start to switch an individual's fund to lower risk investments in the last five years before the planned retirement date, the effect being that if the retirement age is set at 65, people could be heavily invested in equities right up to age 60.

More than half of all men and 34 per cent of women say they want to retire early, with UK workers wanting to retire on average at age 55, according to research carried out by Axa, the insurer, last year. And even though retirement at age 55 turns out to be a dream for most, Britons still retire on average at age 62.

During the five years before you plan to retire, your pension provider will typically switch 20 per cent of your fund each year from equities to more secure investments such as bonds and cash on deposit. This process is called 'life styling'.

You may be forgiven for thinking that a fund described as 'balanced managed' would have far less than 80 per cent invested in equities, but this may not be the case.

Investing heavily in shares when you are younger makes sense, and many experts think that 80 per cent in equities is a suitable proportion for anyone with more than a decade to go to retirement. But as retirement approaches, the volatile nature of equities means a more careful approach may be needed to safeguard your fund.

An increasing exposure to fixed interest investments such as bonds and cash on deposit makes sense for the great majority of people who are close to buying an annuity with their pension pot, because it removes the risk of violent swings in the income they are likely to get in retirement when they buy an annuity.

The Government's pensions watchdog says it is essential to have a clear understanding of the way your pension fund is invested and ensure that it matches your personal retirement timetable and your attitude to risk.

If you would like to discuss your pension provision to ensure that your chosen retirement date reflects when you actually want to retire, please e-mail or contact us for further information.

Levels and bases of, and reliefs from, taxation are subject to change.
Article date: March 2007