There was a time when most advisers would tell you middle-age was the period during which you should be shifting away from risk to protect the capital your pension had accrued as you approached retirement, which might not have been that far away if you’d played your cards right.
Now four years of low growth, negligible returns on cash savings, the soaring cost of living, stagnant property prices and entirely new costs, such as university tuition fees and unemployed children who cannot afford to leave home, mean investors can no longer afford to slacken the pace and protect their capital.
"Middle-age was a different thing 10 years ago," says Kerry Nelson, managing director at Nexus IFA. "People were aspiring to the idea of an early retirement – seriously expecting they could get out at 55 – and these days that’s really not feasible for the majority."
"That age-group is being hammered from all sides and the nature of the environment they’re in means they cannot afford to de-risk at this stage."
"If you move into bonds you’re pretty much looking at negative returns, the return on cash savings is negligible, you have to go up the risk ladder just to sustain your pot, never mind grow it."
This makes grim reading for off-the-peg pension investors, the majority of who will be in products that are doing exactly the opposite, throttling back their exposure to equities in the traditional manner.
For investors who have a self invested personal pension (SIPP) or are looking to transfer their personal pension into a SIPP they control themselves, now is the time to think carefully about asset allocation.
Rob Gleeson, head of research at FE, said: "It’s a tough call, there’s quite a balancing act here. You’ve got about 20 years of savings you don’t want to fritter away, but still have a 15- or 20-year time horizon and the ability to make a real difference to your retirement by taking on extra risk."
"This is basically the only time that attitude to risk really matters – at all other times it’s pretty much overshadowed by time horizon and other situational factors."
Low volatility, high performance funds in key sectors over 5-yrs
| Sector |
Fund |
Performance (%) |
Annualised volatility (%) |
| IMA Global Emerging Markets |
First State Global Emerging Markets Leaders |
86.44 |
17.78 |
| IMA Property |
Threadneedle UK Property |
-5.6 |
2.35 |
| IMA UK All Companies |
Liontrust Special Situations |
57.04 |
16.16 |
| IMA North America |
AXA Framlington American Growth |
48.26 |
16.95 |
| IMA UK Sterling Corprorate Bond |
M&G Strategic Corporate Bond |
56.99 |
5.56 |
Source: FE Analytics
The majority of your exposure should remain in equities, according to Gleeson, with just over a third in fixed income, and a small exposure to property.
"A typical portfolio would be 30 per cent UK equities, 25 per cent international equities, 35 per cent fixed income, and 10 per cent property," Gleeson continued, "Although a more adventurous investor might want to have a little less UK exposure and a little more international equities."
International equities, Gleeson believes, should include emerging markets such as China and India, not just the big developed nations such as the US, Europe and Japan.
Many believe that China will drive stock market growth in the future, and it is tempting to pile into Chinese equities on that basis – but not everybody is convinced.
Societe Generale strategist Albert Edwards told Investment Week’s Nick Paler this week he thought Australia’s 20-year growth story was "a bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China".
Closer to home, RWC Enhanced Income fund managers Ian Lance and Nick Purves told FE Trustnet reporter Mark Smith that they think UK equities are overvalued.
"You often hear people say how one-year forward P/Es look cheap relative to their long-term average," said Lance. "What that tends to ignore is the fact that earnings are very elevated. Shiller P/E, a more stable measure of valuations, shows that the US and UK are trading above their long-term averages."
So if the Chinese miracle is more of a magic trick and the fragile recovery seen this year in UK equities isn’t to be trusted either, what choice does that leave investors who have money to put somewhere?
Nelson says a practical approach is necessary. "I wouldn’t pay off the mortgage right now. The potential growth in other areas is going to be greater than the interest you’re paying on a mortgage – and that’s not likely to go up dramatically any time soon."
"You don’t need to second-guess asset allocation, you want to diversify as much as possible to shelter yourself from the extreme volatility we’re seeing. You can access a broad range of superior funds in different asset classes, equities, bonds and alternatives – that’s the beauty of a SIPP."
This article is the second in our series on investing in SIPPs. To read the first article, written for investors who are looking at SIPPs for the first time, click here.