Should pension savers increase their risk to keep up with inflation?

In some instances clients are having to delay retirement, says Faye Church, chartered senior financial planner at Investec Wealth. “The pension pot they have accumulated and planned for may be on target, yet it is unable to sustain an increased drawdown over the longer term.

“One way to make their pension last longer is to assess the level of risk they are taking over the longer term. Taking a higher level of risk than planned can make a pension pot last longer.

"But care must be taken around their capacity for loss, and whether this strategy could in fact make matters worse if markets did not perform."

Simply increasing the investment risk could just make things worse.Robert Vaudry, Copia Capital

Robert Vaudry, managing director of Copia Capital, a discretionary fund manager, likewise says that investment risk is an even greater consideration for those in retirement, compared to those in accumulation.

“Decumulation portfolios need to support the client’s income needs while dealing with longevity and sequencing risk. Recent market volatility has meant many in decumulation have had to sell assets in unfavourable market conditions so they can continue taking an income.

“The correlation of bonds and equities in falling markets has further contributed to this problem of ‘pound cost ravaging’, eroding the overall value of traditional 60/40 bond/equity portfolios, and increasing the possibility of people running out of money too soon.

“Simply increasing the investment risk could just make things worse.”

Savers who are not near to or at retirement, meanwhile, and increase the risk within their pension, have a better potential outcome, says Church. But whether retirement is a long way off or just around the corner, she adds that the need to review at least annually is essential to making sure plans remain on track.

The good news is that, over the long term, most assets have outpaced inflation.Mamdouh Medhat, Dimensional Fund Advisors

“The challenge for investors is to find assets that outpace expected inflation over the long term, rather than try to change their portfolio as conditions change,” says Mamdouh Medhat, senior researcher and vice president at Dimensional Fund Advisors.

“The good news is that, over the long term, most assets have outpaced inflation. Our research shows that investors who are particularly sensitive to unexpected inflation should consider insurance against that eventuality, perhaps in the form of index-linked bonds or other instruments specifically designed to protect against unexpected inflation.”

Should de-risking be held off amid inflation?

Before pension freedoms, clients would almost certainly have decreased their investment risk in the run up to retirement, says Church.

“Now clients have a lot more choice. Once you have built up your pension pot the fear of losing it may mean de-risking in some instances.

“However, it may be important to keep their investment risk constant in order to generate growth over the longer term in the attempt to make funds last longer and the level of desired income sustainable.”