3 powerful reasons why being risk-averse is a risky retirement strategy

Research by University College London reveals that there is a reason humans become more risk-averse as they get older. It’s because levels of the feel-good natural chemical dopamine reduce, which researchers conclude means the older you are, the less likely you are to take risks.

So, you’d expect that if you’re younger with higher levels of dopamine you’d be more likely to take risks, although a recent study reveals that may not always be true. There’s one area where younger people may not be willing to take any more risk than older generations, and that’s investing in pensions.

The study, carried out on behalf of interactive investor, shows that 4 million workers aged between 18 and 39 have their pensions in low-risk funds. This is despite the fact their pensions could be better off in higher-risk funds, where they might be exposed to more potential growth.

That said, it’s not only younger generations that may want to consider having their pensions in higher-risk investments. If you have more than 10 years to go to retirement, being in more risky investments might also benefit you too.

Read on to discover more about the study and why lower-risk pensions could potentially put your retirement plans in jeopardy.

Two-thirds of those aged 18 to 39 are in risk-averse pensions

The study estimates that 66% of people in this age group are in lower-risk pensions that may not provide the level of growth potential they need. This could mean up to 10 million people facing retirement without enough income to support the lifestyle they want.

Researchers add that 25% of those aged between 18 and 39 are invested in low-risk pension funds, with 41% being in medium-risk investments. These are typically funds where there is a lower proportion of stock market-based investments.

1. Lower-risk pension investments include funds with lower growth potential

If your money is in a risk-averse or medium risk fund, it will have a greater exposure to lower-risk investments. These are typically used to protect your pension against losing money if the market suffers a downturn.

These include:

  • Bonds: this is when governments or businesses borrow money and agree to pay you an income during the life of the loan.
  • Commercial property: some pension funds include property to generate a regular income through rent, while also benefiting from the growth in the value of the property.
  • Cash: despite historically low interest rates, risk-averse portfolios still include cash, which could significantly reduce growth potential.

2. Stocks and shares typically provide greater potential growth

Like the majority of investments, growth in pensions usually comes from its exposure to stocks and shares. The more exposure there is, the greater the long-term growth potential.

The graph below shows the FTSE 100 index over the last 35 years, which despite downturns along the way, has made significant growth during the last three decades.

Source: Trustnet

That said, what makes stocks and shares risky is that a downturn in the market could result in you ending up with less money than you invested, depending on when you try to access it. The good news is that those who invest for long periods – which is typically the case with pensions – can wait for the market to recover so that their investments regain their value and potentially grow again.

Having a different mix of high- and low-risk funds in your pension might help

Because lower-risk investments include cash and bonds, they could provide lower growth potential than higher-risk funds, as the latter typically have a greater exposure to stocks and shares.

This is why you may want to consider balancing pensions. Having higher-risk investments could provide potential growth, while your lower-risk investments could reduce the chances of your retirement fund losing value if the market takes a downturn.

While exposing your pension to higher-risk funds might provide greater growth, always speak with a financial planner to confirm it’s right for you. Please remember: there is never any guarantee a high-risk fund will outperform a lower risk one, and by exposing your pension to more stocks and shares, you may get back less than you put in.

Get in touch

A financial planner will use sophisticated risk-profiling tools to determine the right level of risk for you. They will also ensure you fully understand the growth potential of a new pension and the risks associated with it.

If you would like to discuss the risk level of your existing pension please email hello@ardentuk.com or call us on 01904 655 330.

Please note

This article is for information only. Please do not act based on anything you might read in this article. Contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.


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