Leaving pension fund invested in higher risk fund towards retirement

Hi,

I know the general advice from pension providers is to start to de-risk your pension c. 10+ years from retirement to protect what you have earned. Do many people leave their pension invested in high risk until a couple of years before retirement for continued growth? I know of course the risks involved that the markets could crash etc. but I am wondering if many people take this risk?

Leaving your pension in the higher risk fund for an extra say 8 years could offer excellent returns but obviously carries a large amount of risk. Just curious to hear peoples thoughts.

There are some interesting thoughts in the following threads to get you thinking:

As with a lot of things in life, it depends.

For me, it all comes down to the tax free lump sum. If you have a big pension fund and not much in the way of other assets, a big fall before retirement can have a big impact on your future lifestyle.

Saw you had €800,000 in your fund, that's a €200,000 lump sum. If you retired just when Covid crash hit the bottom, your fund would have fallen to €536,000 and you'd get a lump sum of €134,000 less, €66,000 less.

Now, you can argue that your fund wouldn't have gotten to €800,000 if you had taken it safer but the human mind doesn't work that way. An investor who played it safe, saw no fall in his pension fund and received a lower lump sum will feel happier than someone who left it in equities, saw their fund grow and fall more but still ended up with a bigger lump sum. Because they will be thinking of what they lost whereas the safe investor never had it.

Of course, if you have other assets, you will be able to delay maturing your pension to a time that works for you, as long as it is done before age 75.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

I put my lump sum in very low risk fund.
I'll be drawing it down during the next few years, but I left the rest of the fund in higher risk.
I figure I can live on the cash I have and the cash from the lump sum for some time before I need to draw big amounts from the pension fund.
I can then move portions of the money in the fund a few years in advance if its up.

Edit: Just read that and its not at all clear
What I mean is that a certain value for use as the lump sum is protected.
But I can live off savings until the fund is up to a value that allows me to take the lump sum, and then use the lump sum after that.

I know, it still isnt what im trying to say

The retirement lump sum is 25% of the total fund value at retirement (whatever the investment mix). You cannot segregate a portion of the total fund a few years before retirement and designate that as the lump sum portion (and invest it in low risk strategy). You have to invest the total fund in some investment mix and it’s the total value at retirement that is then divided 25%/75%.

OMG_OMG said:

I know, it still isnt what im trying to say

Click to expand...

Maybe you can split your total fund into multiple policies so that you're only maturing part of your total fund in any one year???

Gerard

www.prsa.ie

OMG_OMG said:

I put my lump sum in very low risk fund.
I'll be drawing it down during the next few years, but I left the rest of the fund in higher risk.
I figure I can live on the cash I have and the cash from the lump sum for some time before I need to draw big amounts from the pension fund.
I can then move portions of the money in the fund a few years in advance if its up.

Edit: Just read that and its not at all clear
What I mean is that a certain value for use as the lump sum is protected.
But I can live off savings until the fund is up to a value that allows me to take the lump sum, and then use the lump sum after that.

I know, it still isnt what im trying to say

Click to expand...

That is a rationale used by life companies for years. Move 25% of the value of the fund to cash and leave the rest in equity based investments. My argument was always as Conan said, you can't ringfence a portion of the fund. The tax free lump sum is a percentage of the overall fund value.

Maybe you were at one of these talks too?

Sorry for confusing the matter.
I know what you are all saying.
What I did was decide i want at least 125k as a tax free lump sum. I have enough to get more than that that assuming markets stay good.
But have boxed that amount off so that even if the rest of the pension goes down, that 125k value is still there as long as its at or below the limit of the cash free lump sum. If i get a higher lump sum and have to take the rest above that 125k out of the equities portion, then thats good.

OMG_OMG said:

Sorry for confusing the matter.
I know what you are all saying.
What I did was decide i want at least 125k as a tax free lump sum. I have enough to get more than that that assuming markets stay good.
But have boxed that amount off so that even if the rest of the pension goes down, that 125k value is still there as long as its at or below the limit of the cash free lump sum. If i get a higher lump sum and have to take the rest above that 125k out of the equities portion, then that's good.

Click to expand...

Are you trying to saying that you have €500k in very low risk funds funds to protect at least €125k as your 25% lump sum? And the rest you have in equities?

OMG_OMG said:

Sorry for confusing the matter.
I know what you are all saying.
What I did was decide i want at least 125k as a tax free lump sum. I have enough to get more than that that assuming markets stay good.
But have boxed that amount off so that even if the rest of the pension goes down, that 125k value is still there as long as its at or below the limit of the cash free lump sum. If i get a higher lump sum and have to take the rest above that 125k out of the equities portion, then thats good.

Click to expand...

But that’s not how the 25% works. As I said earlier, the 25% is 25% of the total fund value. You cannot “box off” any portion of the overall fund to ensure that you can get €125k as a lump sum. If you want to ensure a minimum of €125k then you have to invest 100% of the fund in a secure strategy (Cash!), assuming you currently have a total fund value of c€500k. If your fund is more than €500k then you could invest the bulk of it in low risk strategies, but the 25% is still calculated based on the total value at the time you retire.

If in an occupational scheme, and over the age of 50, can you "retire" at any time, providing you're no longer working for the employer? In other words, can you determine when to draw down the lump sum?

mojoask said:

If in an occupational scheme, and over the age of 50, can you "retire" at any time, providing you're no longer working for the employer? In other words, can you determine when to draw down the lump sum?

Click to expand...

Whenever you draw down the Lump Sum you must also activate the balance- whether invest in an ARF or buy an Annuity. You cannot take the Lump Sum out at say 52 and not activate the balance. When you “retire” you activate the whole fund.

But if you have multiple DC accounts?

Say if you had A with 400k and B with 500k. Can retire one account at a time? How would the 25% work? Would it be for one account of the total of 9ooK?

Ndiddy said:

But if you have multiple DC accounts?

Say if you had A with 400k and B with 500k. Can retire one account at a time? How would the 25% work? Would it be for one account of the total of 9ooK?

Click to expand...

If all the accounts/policies relate to the same employment, then they must all be activated at the same time. So in the example you quote, the lump sum is still 25% of €900k

A guy I know, he retired from a company, took his retirement benefits.
1 million in the pot, took 200K cash, Aaaaarf-ed the rest.
He is aged 51, now works for another company.
Says he needs 2M total in pension to fully retire.
This is a number I keep hearing.

Ndiddy said:

But if you have multiple DC accounts?

Say if you had A with 400k and B with 500k. Can retire one account at a time? How would the 25% work? Would it be for one account of the total of 9ooK?

Click to expand...

You must take your lump sum from each individual policy. As values are priced on a daily basis it is too messy for life companies to coordinate the exact day when the 25% is taken from policy A to cover all of the individual's pension benefits.

When you mature a pension you also have to declare all the lump sums that you have already received so they can count this against the €200,000 tax free lump sum amount.

fistophobia said:

A guy I know, he retired from a company, took his retirement benefits.
1 million in the pot, took 200K cash, Aaaaarf-ed the rest.
He is aged 51, now works for another company.
Says he needs 2M total in pension to fully retire.
This is a number I keep hearing.

Click to expand...

€2m is the maximum sized pension pot that you can have, anything over that you run into all sorts of tax issues. Fair play to the guy you know having €1m that quickly and on the way to amassing another €1m. Most people don't get to that amount (except hospital consultants who shoot way past it. But then, they are training until they are in the mid 30's to get to that position, so fair play to them).


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Conan said:

If all the accounts/policies relate to the same employment, then they must all be activated at the same time. So in the example you quote, the lump sum is still 25% of €900k

Click to expand...

Does this apply for combination of DB and DC accounts relating to same past employment and occupational scheme?

I have both a very small DB element, from when a hybrid approach was being used, when I first joined company, and much larger DC account thereafter.
I am 43. Should I request a transfer valve of the DB element to facilitate the possibility of accessing lumpsum and transferring to ARF from age 50?

Answer to first question is YES
If you have a deferred benefit being a mix of DB and DC, you could ask for a transfer of the DB to the DC. But there is no obligation on the Scheme to agree.