Pension freedoms have also extended the time horizons for investors beyond the point of annuity purchase (at retirement) and up to and beyond the point of death, if we consider the potential to pass money onto future generations.
All other things being equal, this should lead to an increased ability for investors to assume more volatility in their investment for longer than before.
Against these points we have a swathe of the investing public who are (often automatically) invested in products that automatically de-risk over time, often called lifestyle products.
These frequently use an assumed retirement and annuity purchase date that no longer makes sense in a world of pension freedoms, where retiring doesn’t mean being forced to buy an annuity.
Ingrained attitudes mean people are generally more willing to take more investment risk when they are younger and save more as they get older - potentially as this is when people consider them to have the biggest effect.
Continuing to follow an outdated approach of automatically de-risking far too early is forcing many people approaching retirement to save much harder to make up the gap. To make the biggest impact they could also look at saving more smartly with the pot they have already accumulated.
Reducing likelihood of failure
In terms of reducing the likelihood of failure, increasing an individual’s savings rate shows up as having the smallest impact.
Increasing the savings rate by 1 per cent, on average, reduced the likelihood of a goals risk event (that is, running out of money) by around 3.6 per cent, holding all other things equal.
On the flipside, increasing the retirement income requirement by 5 per cent had an impact of a similar magnitude, increasing the chance of a goals risk event by just over 4 per cent.
Investment risk is a powerful counterweight, though. Increasing the risk profile, with the dual impact of increasing both the targeted investment return and the degree of investment volatility, decreased the chance of a goals risk event by around 6.6 per cent.
Finally, the particularly powerful lever of retiring later, given the increased years of savings contributions and decreased years of withdrawals, had the impact of reducing the likelihood of a retirement failure by roughly 14 per cent.
A balancing act
The work here is not meant to be completely exhaustive but highlights some points of consideration.
Balancing risks in planning for retirement is a complex task, previously managed by actuaries and insurance companies.
Pension freedoms offer an opportunity for clients to manage those risks in a way that maximises the chance of meeting their clients' individual goals.
