Investing for retirement comes with inherent risks, but according to Royal London the right multi-asset approach can help the majority of clients overcome the danger of running out of money later in life.
In a report published on Saturday (13 January) the mutual insurer examined ways of spreading risk across a range of assets, which, it said, would provide better returns over a longer period than cautious investing while smoothing the ups and downs of individual investments.
Royal London identified two main dangers for people investing for retirement post pension freedoms, taking 'too little' risk and taking 'the wrong sort' of risk.
Both of these strategies carried the danger of running out of money in retirement or having to face a reduced standard of living, the provider pointed out.
Trevor Greetham, head of multi-asset at Royal London Asset Management and author of the report (pictured), said: "Pension freedoms open up new possibilities for people in retirement, but create new dangers as well.
"We believe the best approach is to spread your money across a range of asset classes and in different markets at home and abroad.
"This is likely to deliver better returns over your retirement and a more sustainable income than being stuck in cash, without exposing you to the capital risks that can come from chasing after more exotic or risky types of investment."
An example of taking too little risk is when the saver takes their tax-free cash at retirement and invests the rest in an ultra-low risk investment such as a cash Isa, believing this to be the safe approach, he said.
The pension freedom reforms have given savers over the age of 55 the option to withdraw up to 25 per cent of their pot tax free, while the remainder is taxed at their marginal rate of income tax.
The paper points out investing in retirement should still be considered long-term investing and illustrates how decades of low-return saving can damage the living standards of retirees.
For instance, a person who retired 10 years ago with an illustrative pension pot of £100,000 invested in cash and who withdrew £7,500 per year, would now be down to £27,000 and be likely to run out within five years’ time, or less than 15 years into retirement, Royal London said.
In contrast, if the same money had been invested in UK shares, there would still be about £48,000 left in the pot, despite the 2008 stock market crash, it added.
At the other end of the spectrum, a retiree taking greater risk by investing in more unusual forms of investment, such as peer-to-peer lending, investment in aircraft leasing or cryptocurrencies such as Bitcoin, ran the risk of being hit hard by bad returns early in retirement.
By way of illustration, the insurer said investing a £100,000 pension pot in UK shares just as the financial crisis hit 10 years ago would have exposed a saver to a severe 30 per cent drop in the first year (2008), wiping £28,000 off the value of their pension pot before they had even got started.
