Should you de-risk your pension before retirement?

As people near retirement, they tend to de-risk their pension investment by moving it into bonds and cash before they mature their pension plan. But will most retirees investing in ARF’s post retirement, should they really be reducing their risk exposure at all?


The idea to de-risk your pension came about originally when the only option at retirement was to purchase an annuity to be paid to you for the rest of your life. Annuity rates are based on long term interest rates so it was believed that to transition your pension into bonds and then into a product that used bonds.

Tax Free Lump Sum

An argument is made by plenty in the pensions industry that there is no need to de-risk your pension when approaching retirement as the investment journey doesn’t stop at retirement but will continue for as long as you own an ARF. If the value of the pension falls before retirement, you will then buy at a lower price when you invest in your ARF. While 75% of your money will continue into the ARF, the other 25% will be crystallised and taken as a tax free lump sum.

The tax free lump sum has a special place in the hearts of pension holders. This money is seen as the cherry on top. The money that is used to treat yourselves or others and you obviously want as big a lump sum as you can get. If you had a pension fund of €800,000, you are entitled to €200,000 tax free. If it falls 20% in the months before retirement to €640,000, you will receive €160,000 tax free. A difference of €40,000 tax free is a significant amount of money. Telling a pensioner that at least they can invest in their ARF at lower prices won’t be much comfort.

Change of Risk Profile

Some retirees feel a vulnerability without the security of a monthly pay cheque. They are now living off their investments and don’t like the feeling of their income coming from something that can go up and down in value and are happy to trade off the chance for higher future losses for the chance of lower falls.

As an advisors, we should also be looking at “capacity for loss” when talking to retirees about their wealth in retirement. Will your lifestyle be significantly altered in a worst case scenario with your investments. If all their money is in an ARF, having a best possible return investment approach won’t be suitable as a 50% fall in fund value will have a serious impact on their lifestyle either now or if major adjustments aren’t made the fund could run out early.


With decades of experience working with people moving from working life to retirement we have found that most people prefer to consolidate what they have coming up to retirement, maximise their tax free lump sum and start anew with the ARF.


If you have any questions, drop me an email at


Steven Barrett

26 October 2020