Why I'm not ready to de-risk my pension pot

The tenth anniversary of George Osborne’s 2015 pensions revolution is approaching. A decade ago, his ‘freedoms’ provided a fig leaf for what was becoming obvious - that retirement risk had shifted irreversibly from the state and companies to individuals. For my generation that’s not just interesting. It’s personal. We are the advance party in an ongoing retirement experiment. With no defined benefit pension to rely on, the comfort or otherwise of our final years will be determined by: how much we’ve saved; how kind the markets are to us; and our life expectancy. Only one of these is in our gift.

Fortunately, I’m lucky enough not to require anyone’s sympathy.  Despite, rashly, getting divorced at the age of 61, I am mortgage-free and I work because I choose to. My financial planning is, therefore, an intellectual exercise and not a ‘three in the morning, stare at the ceiling’ swirl of anxiety. For that I am profoundly thankful. Thinking about money is also what I do. I’m happy to make the investment choices that many of my fellow travellers find overwhelming.

That said, it’s interesting how much harder it is to make financial decisions when the clock is ticking, and you can no longer rely on time to undo your mistakes. I say that I work for enjoyment. But I’m also aware that employment puts off the day when my pension pot will stop being a number on my computer screen and start being the source of my retirement income. Things are simpler when you have a salary.

But back to George Osborne. When he, overnight, removed the obligation on new retirees to swap their pension savings for an annuity, he turned on its head the old thinking about investment risk - specifically when, how or whether to reduce that risk in the run-up to retirement. Before pension freedoms, a sharp fall in the value of your pension pot in the run up to your retirement was the nightmare scenario. So, you eliminated that risk by moving out of more volatile assets like shares and into cash or bonds. To someone needing instead to draw an income from their investments, perhaps over decades, that excess of prudence now looks like a bigger risk than the ups and downs of the market. It ignores the biggest hurdle for a comfortable retirement - inflation.

As part of my thinking about how to navigate a hopefully long, but potentially inflationary, retirement, I recently challenged myself to come up with a portfolio of ten funds that I would be prepared to buy and hold for a decade. With all the usual caveats about this not being investment advice but a description of what I am doing with my own money, here is my ten for 10: Rathbone Global Opportunities, Brown Advisory US Smaller Companies, Dodge & Cox Worldwide Global Stock, Fidelity Global Dividend, iShares Physical Gold ETC, International Public Partnerships (an infrastructure investment trust), iShares S&P 500 Equal Weighted ETF, Fidelity Special Situations, Fidelity Global Technology, and Lazard Emerging Markets. 

This is a portfolio of funds designed to cover off a range of unforeseeable outcomes. It has a growth and value focus. It is diversified. There are some defensive options, uncorrelated with shares. It is agnostic about whether the US stock market continues to lead the way or loses its edge. It nods to the long-term growth of emerging markets and the ongoing importance of technology.

• Read: Ten for 10: Funds to buy and hold for a decade

But it is a punchy portfolio in terms of investment risk. There are no bonds. No cash. It is not what you would suggest to someone getting ready to hand their money over to an insurance company in exchange for a guaranteed income for life. It is not an attempt to de-risk my investments. So why am I doing this at the age of 61? For two reasons - because I can and because I need to.

The ‘can’ reason has two parts. The first is that my capacity for temporary stock market loss is relatively high. Our ability to withstand the short-term ups and downs of the stock market - in practical cash terms but also psychologically - is directly related to how much cash or cash-like assets we can set aside to protect our investment portfolio. If you are fortunate to be able to leave your portfolio untouched for two to three years if the market turns against you, history suggests there is a good chance that it can rebound from the reversals that are part and parcel of stock market investing. Having a cash buffer is calming.

The second ‘can’ reason is because I’m still able and willing to work. I have my colleague Andrew Oxlade to thank for the concept of CHILL - or Career Happiness Inspires Longer Lives. I agree with him that work in later life is good for you - as long as you are lucky enough to do something you enjoy. Aside from the mental health advantages of working - particularly part-time in a phased approach to retirement - every year of earning enough to cover your outgoings is a year in which your investments are free to work for you in the background.

• Read: Retire early? Forget ‘FIRE’ and follow ‘CHILL’
• Listen: Want to retire early? Why you need less FIRE and more CHILL

These two positive reasons are made necessary by the negative one. This is best illustrated by the Bank of England’s excellent inflation calculator tool. It tells me that I would need £30 to buy what £10 would have bought me in 1985 when I graduated. I will be surprised to still be here in 40 years’ time. But, if I am, at the same rate of inflation I will then need £90 for those same purchases. De-risking my investments can - and maybe must - wait.

This article was originally published in The Telegraph.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of the sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. The shares in the International Public Partnerships investment trust is listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The Key Investor Information Document (KIID) / Key Information Document (KID) for Fidelity and non-Fidelity funds is available in English and can be obtained from our website at www.fidelity.co.uk. Please note that the funds mentioned here and the Select 50 are not a personal recommendation for you. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.