I currently have the largest part of my pension fund invested with the NEST Workplace Pension scheme.
As I have more than 20 years of working life left, I have chosen the NEST Higher Risk Fund, which has performed reasonably well from what I have read.
However, there are further options to choose from as below:
Option 1: Reduce risk as you approach retirement
When I am ten years from retirement, NEST will reduce my fund’s risk by moving my pension pot to ‘the appropriate NEST Retirement Date Fund’. It is explained that The NEST Retirement Date Fund gradually moves my money out of higher-risk investments as I approach retirement. This means that I could ‘potentially miss out on any big rises’, but it is also explained that this strategy is less likely to lose whatever money I will have built up.
Option 2: Continue with higher risk until retirement
Basically, this strategy keeps my pension pot invested in the same higher risk / higher return options until my retirement date.
On the face of it, and going by NEST’s guidelines, Option 1 is the safer option – according to NEST, I am reducing risk by shifting to ‘safer’ funds. Which also means, my returns will be lower.
Option 2 obviously offers higher return potential, but with the risk that if there is a crash close to my retirement date, I could potentially lose a large chunk of my pension fund.
Possible Scenarios
However, what if the following scenario were to unfold:
There is a stock market crash shortly before my ten years from retirement date, my fund is then shifted into the ‘safe’ fund options. Meaning my depleted fund has 10 years of average or below-average returns potential in the safer fund options.
If there is a crash 10 years from my retirement date, and I have selected Option 2, the high-risk strategy means I will have ten years of high reward/risk strategy to try and make back the money.
Another scenario could be if there is no substantial downturn in the stock market – which means Option 2 would definitely be the better option.
So I am wondering if anyone could help me out here? Is the ‘safest’ option really the high-risk route?
Please comment below if you would like to contribute to this discussion.
Feedback
@andrewyoung0811 responded on Twitter with the following – thanks, Andrew!
If it were me, I’d go with option 1, a gradual reduction in risk 10 years before retirement. You’ll still have some higher-risk assets but your portfolio will gradually reduce in risk over time…
The gradual reduction is important. If at the 10yr b/f retire. date, the market suddenly crashes, that’s acceptable because you’re not shifting everything to safe assets on that date. The gradual reduction balances growth, a longer-term bet on the stock market and preservation.
And if it were me, I’d forget about all the possible scenarios. Only care about what you can control. All you can control is your portfolio and a graduation risk reduction is a sensible approach. You’re getting into the wealth preservation, rather than growth, stage now.