De-risking Assets Before Pension Draw Down

Hi All

I hope to stop working next year at the age of 63 and would appreciate your advice on de-risking my assets in preparation for the eventual purchasing of an ARF.

To date I have avoided de-risking and reallocating to cash or other less volatile assets, benefiting from the compounding effects of the market.

The volatility experienced by the market earlier in the year, although the markets have recovered, has made me change my mind in this respect as I doubt that I will have sufficient time to let the markets recover next time a downturn occurs. The prospect of a 20 – 30% market decline before I stop working is not very appealing.

Over the next year I hope to gradually move approx. 5% of higher risk assets to lower risk assets per month. I understand the inflation risk with this approach. What is the view on whether or not this is a good approach?

The reallocation to less volatile assets is likely to be only a short-term measure as I hope to have sufficient equities in my ARF to allow for future growth.

Does anyone know whether I can transfer equities in my pension fund directly to an ARF without the need for selling them (incurring both commission and FX charges) and then buying them again (incurring both commission and FX charges) when I purchase the ARF?

Any advice as usual is appreciated.

Many thanks

LT

Hello,

If you were to convert all assets held in your pension today, would have have sufficient funds to cover you in retirement ?

If the answer is yes, then I'd suggest that you don't gamble and move out of higher risk assets immediately.

If the answer is no, then I'd suggest that you either:

- revisit your retirement plans and push out your retirement age, to keep earning an income for longer and making further pension contributions

or

- find ways to reduce your living costs, for the long term.

Perhaps you need to consider what investment strategy you might adopt for the ARF. If, after taking the 25% lump sum, you reinvest the remaining 75% into an ARF, then what strategy/risk profile will you adopt? If your current funds are say in a typical Managed Fund (c70% in Equities) and you see yourself investing the ARF in a similar fashion, then I see little point in de-risking in the run up to retirement.
If however you plan to invest the ARF into a conservative strategy, then perhaps some de-risking might be sensible.
You really need to look through to retirement and beyond. Your timeframe is now c25/30 years, not 6 months.

I think you should view your ARF as essentially a continuation of your pension.

It should be possible to transfer assets from your pension to an ARF in specie (ie without selling and subsequently re-buying).

As regards your broader question on asset allocation in the run up to retirement, I personally take the view (which many on here consider overly conservative) that it is prudent to have 10 years of anticipated expenses (10X) in cash.

So, if you expect to spend €40k a year in retirement, you would have €400k in cash and the balance of your assets could be invested in a global equity fund.

Critically, the 10X doesn’t have to be held in your ARF - you could hold 10X outside your ARF.

Sarenco said:

I think you should view your ARF as essentially a continuation of your pension.

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This is the key point.

There might have been an argument in the past for "lifestyling" - reducing the percentage of equities in your pension fund because you had to buy an annuity on retirement.

There is no need for that anymore as you don't need to buy an annuity.

So decide your long term investment strategy and ignore the fact that the label will change from "pension fund" to "ARF" and "my own money".

LiferT said:

The reallocation to less volatile assets is likely to be only a short-term measure as I hope to have sufficient equities in my ARF to allow for future growth.

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This shows how meaningless your de-risking strategy is. You are converting equities to cash only to convert the cash back to equities again.

Doesn’t seem to be mentioned above but I have a colleague who specifically moved everything to cash last year within 6 months of retirement. The main reason was to protect the lump sum. However to do this entirely you need to move all the money, not just the portion available as a lump sum.

Eg if in the example above say you have 800k currently and need your 200k lump sum to clear your mortgage. So you move just this 200k to cash a year out thinking it is now safe but leave 600k invested. A year later you retire but your 600k has had a v bad year and is only worth 500k, plus your 200k cash. Now you only have 175k lump sum available to you, not 200k even though it was in cash, as you can only take 25%,for your lump sum.

Of course a year out you could lose more than that moving it to cash, but 6 months or so out it’s an option to give you certainty.

Most people should be 100% invested in equities and I have set out the reasoning here. Of course, others disagree.

I would strongly disagree with @Brendan Burgess position

My counter arguments are set out here


And in more detail here


I would also take issue with his position on including the family home in the argument that they can afford to take more risk because they own a property

Setforlife said:

However to do this entirely you need to move all the money, not just the portion available as a lump sum.

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In some cases there are other options. E.g. a PRSA that can be split into smaller policies that can be accessed independently (both the tax free lump sum and ongoing benefits/income) rather than it being a one time only/all or nothing event to retire oneself/one's pension.

Will you have full contributory pension at age 66 ?
If so you have some guaranteed income for life beyond this age.

You could spend your tax free lump sum from age 63 to age 66, up to the equivalent of the COAP.

You could estimate what guaranteed yearly pension you need for essentials. You could buy an Annuity to give you this extra income.

You will then have less to worry about regarding market fluctuations.

You would then be in a position to invest the remainder of your pension funds into a higher risk ARF.

You could move the estimated Annuity cost into lower risk funds until you retire.

Brendan Burgess said:

Most people should be 100% invested in equities and I have set out the reasoning here

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You can read the key threads and Marc's links articles as well.

The main problem with being invested 100% in equities is that you might be unlucky and there might be a sustained fall in the first few years when you are drawing money down so your pot will be permanently impaired.

This is only an issue if all of your assets are in equities - i.e. you don't have the Contributory Old Age Pension and you do not own your own home.

But a more typical asset spread would be a pension fund of €600k and a mortgage-free home worth €600k and entitlement to an OAP.

But if you don't own your home, and if, for some reason, you will not get a state pension, those who suggest that you should have some of your pension funds in cash or bonds are correct.

Hi All

Thank you for your replies. Much appreciated.

In response to S Class, I will be in receipt of a full COAP at 66 and the prospect of a guaranteed income does provide a level of comfort.

In relation to total assets, some are held outside of a pension which to me would support the idea of having an ARF containing 100% equities.

However, on this point, if I lived in the UK and understand it correctly, I could avail of flexible draw down, where in the event of a down market I could choose not to draw from the ARF equivalent and instead live off savings for the duration of the downturn.

I don’t think that this is possible in Ireland where, as I understand it, an imputed distribution of a minimum of 4% of the fund will be taxed anyway, regardless of the preference of the ARF owner or whether the market is up or down.

Perhaps someone could confirm this.

This would put me off having 100% in equities as I would prefer not to have to sell them in a market downturn.

I would like to get some advice on setting up a bucket strategy, comprising a bucket containing a few years of cash and another bucket with the remainder in 100% equities. During a downturn I would opt for drawing an income from the cash bucket. When the market is up, I would replenish the cash bucket from the equities bucket and draw an income from that.

I would like to control the draw down myself.

Is this a good idea and does anyone know of a provider who would facilitate this?

Thanks again


LT

LiferT said:

I would like to get some advice on setting up a bucket strategy,

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I keep seeing articles about "bucket" and "silo" strategies for managing pension drawdowns and it all seems like the latest flash in the pan/fashionable gobbledygook to me and unnecessarily complicating matters. But maybe I'm missing something...

ClubMan said:

In some cases there are other options. E.g. a PRSA that can be split into smaller policies that can be accessed independently (both the tax free lump sum and ongoing benefits/income) rather than it being a one time only/all or nothing event to retire oneself/one's pension.

Click to expand...

That wouldn’t help at all in the example given though where someone is trying to protect their very near retirement plan in a very uncertain year like this year for example. Whether you setup multiple PRSAs or arf etc is moot if market drops mean you can’t afford to retire yet and need to work another year or two.

Re being fully in equities, that’s fine once retired, the example was how to protect your very near retirement plan. Once your guaranteed you can retire as plan and then actually retired you could then of course put your full arf in equities or indeed your lump sum too if you didn’t need in for something else.

ClubMan said:

I keep seeing articles about "bucket" and "silo" strategies for managing pension drawdowns and it all seems like the latest flash in the pan/fashionable gobbledygook to me and unnecessarily complicating matters. But maybe I'm missing something...

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Looks pretty obvious that you are missing something. Makes a degree of sense to avoid sequence of return losses as long as your low risk or cash bucket is kept to a couple of years expenses max.

It’s very hard to advise without knowing the OP’s overall wealth.

I think of my wealth at retirement as the notional or actual value of:
-DB pensions
-Irish state pension
-UK state pension
-DC pension fund
-Other financial assets

My DC pension fund at retirement will be about 25%-35% of total wealth and I intend to keep it all in equities for life. This is because state and DB pensions will give me a quite comfortable lifestyle on their own.

For the typical AAM poster DC fund is likely to be a higher share of retirement wealth. A more conservative strategy might be appropriate.

LiferT said:

This would put me off having 100% in equities as I would prefer not to have to sell them in a market downturn.

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This is the bit you are missing and people seem to have difficulty with it. You have to sell them, but you don't have to get out of the market. So you take the money out, pay your Income Tax, and reinvest in shares.

Flybytheseat said:

Looks pretty obvious that you are missing something.

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The bucket strategy seems to have some psychological comfort, but it makes no sense.
Timing the market just does not work.

It's like the guys who claim that the secret to making money on the stockmarket is to buy low and sell high. It sounds appealing until you examine it.

Next people will be recommending dollar cost averaging.

It's simple enough. If you have a guaranteed income in terms of a state pension and you own your own home, put the rest of your assets in the stockmarket.

If you need cash, sell shares. Or if you have an ARF you are going to have to sell them anyway, unless the dividends are sufficient.

The ‘bucket’ strategy seems to be as mentioned above mostly used by early retirees. That’s what most of the YouTube and web stuff is about, I.e people retiring at 50/55/60 with a long way to go to old age pension. It makes a lot of sense to protect more against sequence of risk in those scenarios.

Sequence of risk applies only if running out of money will leave you in destitution
For example, your only assets are €400k in cash/pension. No home so you are renting. And no OAP - contributory or non-contributory.
If that applies then by all means put some or all of your resources into a bucket.

But if you own your own home and you have an OAP which 99% of people have, then you don't need buckets

You must look at your total wealth and not just one part of it when planning your finances