Are repressed memories of the 2008 financial crisis influencing behaviour today? Recent research certainly suggests pension savers attitudes are changing, as over 50s are becoming increasingly risk averse with their investments. A study from Retirement Advantage has found that 39% of over 50s are unwilling to take any financial risk with their pension at all, an increase from just 26% in 2017.

What happened?

Market volatility was eerily calm during 2017 and many investors enjoyed steady gains. The calm before the storm. In February 2018 the storm hit; markets were shocked by a sudden drop and although have since recovered, investor confidence also took a hit.

It’s not likely to be the end of market turbulence either, as Andrew Tully, Pensions Technical Director at Retirement Advantage explains: “If anything, the volatility is likely to continue, with global uncertainties permeating major economies [and] the prospect of interest rates rising.”

The result; only 17% of people are willing to take a reasonable amount of risk in their pension in exchange for a reasonable investment return. But what are the implications of this overly cautious attitude?

Being risk averse is riskier than you think

The FCA recently found that 33% of retirees taking pension income without financial advice are only holding cash in their pension. They also discovered that a number of providers will default your pension into cash when income is taken without investment instructions.

Holding only cash, or having it make up a significant proportion of your portfolio, over an extended period carries an inherent risk of its own; inflation.

The effect of inflation over time is huge. With the rate of inflation (CPI) currently sitting at 2.4% this far exceeds the Bank of England’s base interest rate of 0.5%, which is indicative of the return you are likely to receive on cash investments. (Rates at June 2018)

Ultimately, the buying power of your pension will be eroded. As the FCA explain: “Holding funds in cash may be suited to consumers planning to drawdown their entire pot over a short period. But it is highly unlikely to be suited for someone planning to draw down their pot over a longer period.” They continue: “Someone who wants to drawdown their [pension] over a 20-year period could increase their expected annual income by 37% by investing in a mix of assets rather than just cash.” That’s a huge difference.

Don’t just expect volatility, exploit it

It would be prudent to assume future economic uncertainty, but history has shown markets do bounce back and recover. A panic-fuelled withdrawal when markets drop is incredibly counterproductive, you would effectively be ‘locking in’ the loss.

With prices at a new low, and assuming you are not intending to retire in the very near future, making additional contributions now could well be the best course of action! Naturally, recommendations are personal to your circumstances, but if you are concerned about the performance of your pension or the level of cash you are holding, get in touch with one of our financial planners.

With any portfolio, be it your pension, ISA (Individual Savings Account) or otherwise, the level of risk you are willing to take must be carefully measured and regularly reviewed. A carefully managed portfolio with input from experts is the best way to balance potential gain with potential risk.

It’s human nature to try and predict the future, but flying cars and tin foil jumpsuits are still consigned to 60s speculation. We may not have a crystal ball, but you can be prepared by:

• Being realistic with your expectations
• Not making rash decisions
• Embracing volatility, and
• Keeping in regular contact with your financial planner

Finally, one last quote from Mr Tully: “One of the best moves anyone can take to planning for their retirement is seek advice from a professional financial adviser.” We prefer financial planners, but wise words nonetheless.