De-risking Assets Before Pension Draw Down

Fortune said:
I think this one is based on the FOMO of retiring with a smaller tax free lump sum because equities dropped before you retire.
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This is exactly why my colleague did it and it turned into a good decision, in spite of it being ‘lucky’ or totally wrong as some people might think. He needed a certain lump sum to clear mortgage from his pension, he planned early retirement for when he met this figure and the pension figure to fund his retirement. He planned to retire in April this year then, basically once had made the most tax efficient salary for this year. He moved to cash 5 months ahead of this and could totally relax that he has a risk free plan in place and of course retired as planned. Global upheaval showed a significant risk of a very bumpy year this year.

As it turned out April would have been quite bad timing if he hadn’t of done this and he would have had to change his plan, retire with a fair amount less (~ 2 years spend)or postpone his retirement, which would have been tricky as our notice for it is quite long.

Perhaps it’s a specific planning thing coming from engineering and project management principals but the idea you just do what will work most of the time for everyone else and don’t plan for guaranteed success is just something I don’t understand. I.e you have time, cost and quality as 3 parameters for any decision in engineering or project management and retiring early is a project with this variables. I’m personally not sure I’d do the same, but I’d hopefully plan to retire when I have a fair bit more leeway cost wise.
 
Setforlife said:
This is exactly why my colleague did it and it turned into a good decision, in spite of it being ‘lucky’ or totally wrong as some people might think.
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And did he get back into equities with his ARF?

You can't time the markets.

There is an issue with people who have a specific plan for the tax-free lump sum - such as paying off the mortgage.

If you were buying a house in the short term, you should not invest in the stockmarket in case you don't have the deposit when the time comes.
Depending on the circumstances, something similar could be happening to a person approaching retirement. Especially if they have an interest only mortgage about to mature when they retire.

Having said that, they would still be able to pay off the bulk of it in most circumstances. So you would need to look at the specific circumstances of the person. But, as a general rule, it is wrong to move into cash as you approach retirement.
 
Setforlife said:
He needed a certain lump sum
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Seems prudent in those circumstances to protect it once it's achieved.

The thought suddenly occurs that if the rules allowed the lump sum to be based on salary and service and the balance to be ARFable (read an article recently suggesting it was being considered), them a lot of this type of discussion would go away as the lump sum wouldn't be entirely dependant on the fund value.
 
Fortune said:
The thought suddenly occurs that if the rules allowed the lump sum to be based on salary and service and the balance to be ARFable (read an article recently suggesting it was being considered
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There's also the potential of a change to taking the full 25% at one moment in time. But, that's an option now for some with multiple PRSAs and maturing them at different times.

Gerard

www.execution-only.ie
 
Brendan Burgess said:
And did he get back into equities with his ARF?
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I don’t believe so, pension minus lump sum went straight into ARF but I think into a balanced medium/high risk fund, so probably 80% equities or so I guess. I don’t agree with this part of the strategy but he is using a kind of later in life, lifestyling approach. So early 60s, mostly in equities to combat inflation, but plans to move into less volatile bonds etc as he hits oap age. This part is the opposite of what I would do, but he hasn’t got kids and is a big fan of certainty. Again, career bias of being responsible for people’s lives in relatively dangerous work might be a factor here, in both making sure could retire early and wanting to have a certain future, at least for things under your control.
 
A portfolio with an 80% allocation to equities is pretty aggressive for somebody in their 60’s that is in drawdown mode.
 
For sure.

But we’ve been told the lump sum was required to pay off a mortgage so I’m assuming there are minimal liquid assets outside the pension.

For somebody that craves “certainty” an 80% allocation to equities seems an odd choice.
 
I’m not certain on allocation, we are just now ex colleagues and it only came up discussing his unexpected early retirement. I believe it’s about right though, and would guess it’s a very healthy pension fund compared to average (1-1.5m) , so once retired can afford a level of risk but still have pretty much certainty on staying retired. It’s also possible the lump sum went to mortgage, plus French holiday home and/or boat, I’m sure you’ve all had conversations with colleagues that certainly never give the full story.
 
Setforlife said:
It’s also possible the lump sum went to mortgage, plus French holiday home and/or boat,
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So he could have taken the "risk" of leaving his fund in equities. If they crashed just before he retired early, he would have been able to repay the mortgage, but might have had to wait to buy the boat.
 
I only stumbled on this thread a short while ago.

There have been references (some disparaging) to my "equity only" strategy for my personal pension (ARF).

I haven't read through the thread, but a few comments that may be of some assistance are as follows:

1. As some readers know, I've kept a record of my ARF's performance since I "retired" in December 2010. Regular updates are provided elsewhere on this forum. The record for the 14.5 years to 30 June 2025 is that, for every €100,000 invested at the start, I've withdrawn €119,700 (around 6% pa, increasing) and the value of the remaining fund at 30 June was €197,600. I haven't compared my fund's performance with unit-linked funds, but I think my return has been about average. I don't know of anyone else who has kept a record of their returns (or clients' returns in the case of advisers) over that period. If they have, I would like to compare.

2. Critics claim that I was lucky with my timing. I don't disagree. The last 15 years were good for stock markets; however, history shows that most periods that long are good for stock markets. The average (money weighted) return over the entire period was 10.8% a year. Even if I had earned 4% a year less on average, I would still have done extremely well compared to the alternative of a "low-risk" portfolio. Earning 4% a year less would have meant a fund at 30 June 2025 of less than €75,000 for every €100,000 invested at the start (compared with an actual fund value at that date of €197,500) yet even a remaining fund of €75,000 (allowing for actual withdrawals) would still have been far better than a "low-risk" portfolio.

3. Some say that I've taken excessive risk. I don't think so. I've invested (mainly) in sound businesses that I was confident would deliver good long-term returns. For example, Phoenix Group Holdings has been the ARF's mainstay for the last ten years or so. I bought it because it paid a good dividend. I also felt that the dividend was safe. (It helped that I was familiar with the industry and knew that Phoenix was a cash cow - but everyone else knew that). The dividend for 2019 was 46.8p a share and had increased to 54p a share for 2024 without any fall in the meantime. The dividend never fell in all the time I held the shares (since 2015). I'm reasonably confident that dividends will keep increasing in future. It's proven to be a safe investment. Yet its market value fell by over 20% in early 2020. Was I worried? No. It was much the same with other companies in my portfolio. Investors in unit-linked funds don't have the same transparency to the underlying businesses, but the reality is still the same, if you're invested in a unitised fund. Some advisers are good at pointing that out to clients.

4. I've been castigated for defying the much-warned-about "sequence of return risk", or "Euro-cost ravaging" as some call it. The theory is that a poor sequence of returns at the start can play havoc with fund values. I agree of course that a sharp downturn at the start can spell bad news for an all-equity portfolio; however, the vast majority of pensioners don't suddenly arrive at retirement date with a big cash lump sum to invest, which appears out of thin air. Their fund has been built up over many years. Typically, sharp falls occur after sharp upturns. For example, many have asked me what would have happened if I had retired on 1 January 2000. Market values (I'm looking at the UK market) fell 6% that year, then by 13% in 2001 and by 23% in 2002. You'd have been in a bad way at the end of 2002 if you had started drawing down on 1/1/2000. However, the market rose crazily in the previous five years - by 24%, 17%, 24%, 14% and 24% respectively in 1995 to 1999 - so someone who retired on 1/1/2000 with an equity-only portfolio couldn't complain much. My personal solution to sharp rises and falls in market values is to base my long-term planning on smoothed returns, which smooth out the craziest rises and falls in the market.
 
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@Colm Fagan - I presume that:
  1. You own your own home?
  2. You have other (significant?) non pension savings/investments and/or income streams?
  3. You qualify or will qualify for the OACP?
Apologies if these questions are already addressed in your previous update posts - I've been meaning to set aside some time to read them but haven't managed to do that yet.

 
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