SIPPs: What to do if you’re approaching retirement

Older investors face an excruciating choice as they consider whether to start drawing money from their pension at a time when cash returns are invisible, or remain invested in a market of unprecedented volatility.

SIPP investors approaching retirement are entitled to start drawing money from their pension from the age of 55 onwards, but cashing in some or all of the pension and switching to cash may be a decision they will live to regret.

Returns available on cash are dire and plunging equity values make this a bad time to be selling hard-earned stakes.

Further, huge volatility in the market means investors risk pulling their money out at a time when markets are in freefall, realising far less of their pension pot than they’d planned for, only to miss out on the inevitable bounce when it comes – compounding their woes.

Tim Cockerill, head of collectives research at Rowan Dartington, said: "It may turn out that this decision is absolutely critical for people in this position."

"If you’re looking at retirement in three years then you need to be very, very cautious. What you don’t want to do in three years is find that your pension pot has dropped 25 per cent, that’s painful and it’s even worse if you’ve been taking money out of it and eroding its value even further."

An attractive option for many investors at this stage is to pay off the mortgage, securing their home permanently.

Whether this will work depends on their situation. Cockerill explained: "It depends on your interest rate. If you’re on a tracker and you’re only paying 1.75 per cent you have to ask yourself can you get a better return elsewhere, and the answer is yes – so it should be a consideration."

Shifting some of an asset pool into cash may have advantages too. Rob Morgan, investment analyst at Hargreaves Lansdown, said: "One of the benefits of cash is that if you feel that this is a bad time to be invested, holding cash does allow you to get back into the market when you see opportunities."

"The effect of Greece on the equity market is profound and in the aftermath of that there are bound to be opportunities, but the timing of that is nigh on impossible – events move so quickly it would be very difficult to get back in at the right time."

"I’d be tempted to remain invested."

Cockerill agrees. He thinks investors at this delicate stage should play their hand carefully, and without resorting to extreme measures.

Investors who are only a few years away from retirement should be extremely cautious, he says, and cash is appropriate for them, but for those with a longer horizon it is important not to bail out just yet.

He explained: "The common sense approach boils down to diversification. The outlook is far from clear. Equities appear cheap but then you could get a really bad situation in Europe, and China could continue to contract economically, in which case those valuations may not look so cheap."

"Look at the bond markets. Gilts look really expensive – but that’s a historical context they’re being put into. Perhaps gilts are trying to tell us something about the economic future, and it’s not good news."

Cockerill thinks investors should retain their exposure to international equities, focusing on high quality companies and funds that invest in them.

"M&G Global Dividend fits the bill nicely," he said. "Quality is the key feature. Even if you get difficult conditions ahead, if you’re buying quality, what you’re getting is an assurance that those companies should come through that period and out the other side."

Cockerill believes fixed interest exposure is also appropriate. "There’s more value in the triple-B end of the investment grade market – that should be included – and funds like Baillie Gifford Diversified Growth and Miton Special Situations on the multi-asset side are also attractive; they have low correlation and provide diversification and downside protection."

Morgan thinks Francis Brooke’s popular Trojan Income fund is another attractive choice in this context. He said: "Something like Troy Trojan if you have a few years left before retirement is an option. The manager is very value conscious and is only building exposure where he sees value. Miton Special Situations is a similar one – Martin Gray has a total return mentality."

Gold is no longer the safe haven it was, and neither adviser believes it would make a sound choice for SIPP investors at this stage.

"Gold has really struggled," Morgan commented. "It’s down massively from its peak and it’s not a safe haven in the current climate at all. What it does is protect against sustained devaluation of currencies over a long time, but it doesn’t protect you from market volatility at all – people are using the dollar instead of gold, which has been rising and falling in line with other risk assets recently."

Cockerill concluded: "With some exposure to property as well, perhaps via a fund like L&G UK Property, you are creating a balanced portfolio which I’d like to think will give you a good chance to ride out whatever’s coming."

"If they resolve the euro problem and China suddenly starts booming again, this type of portfolio won’t keep up, but I don’t think that’s what’s going to happen – I don’t know what will, and I’d rather hedge my bets."