How should your portfolio be positioned? Millions of people over 50 are afraid of the risk associated with pension investments

The question is whether to de-risk or not to de-risk

Inaction could result in irreversible losses. If you move too soon, you will lose out on big gains that could change your retirement.

According to new research, when deciding what to do with their pension pot before retirement, three-quarters of people over 50 say risk is crucial. How should your midlife portfolio be positioned, according to experts, to handle market fluctuations?

Current market volatility brought on by the possibility of international trade wars has demonstrated how erratic financial markets can become when uncertainty is high. The repercussions are especially severe for those over 50 who have less time to recover losses from invested pension funds.

According to recent Standard Life research, two-fifths (41 percent) of people over 50 who have not yet retired anticipate experiencing a decrease in their risk tolerance as they get closer to retirement. Out of 2,000 people surveyed, the vast majority (76%) stated that risk was their top pre-retirement concern. This sentiment was extrapolated to the millions of people over 50 in the UK.

However, individuals over 50 must strike a balance: if they de-risk too soon, they risk missing out on possible gains; if they de-risk too late, they run a higher risk of having to withdraw from a declining portfolio.

Individuals will have different attitudes toward risk, but recent market volatility has made it abundantly evident how this can affect a person's pension savings, according to Claire Altman, managing director of individual retirement at Standard Life.

This is particularly true for people who may be considering or have already begun taking withdrawals from their pension funds. At this time, retirement funds are more susceptible to significant losses that could affect a person's retirement way of life.

I'm in my 50s; should I de-risk my pension portfolio?

The saying goes that people should "own their age in bonds"; that is, when a person reaches their fifties, half of their portfolio should be in lower-risk bonds and the other half should be in riskier stocks.

But as wealth adviser Evelyn Partners' managing director Jason Hollands noted, thinking can seem so archaic these days.

"It dates from a time when average life expectancy was lower than now, and it also relates to a time when people were required to use their pension pots to make the one-time purchase of an annuity to provide them with a guaranteed income from life," he said.

The majority of people with defined contribution pensions now opt to keep their investments and take withdrawals from their pension pots rather than using them to purchase an annuity, thanks to the 2015 introduction of the Pension Freedom Reforms, which increased flexibility in how pensions can be accessed.

Annuity sales, however, have been increasing lately as improved rates brought about by high gilt yields.

De-risking your invested pension pot before this crucial purchase makes a lot of sense if your retirement plan is annuity focused and you want greater control over your future income, according to Hollands.

"You don't want to be at risk of a stock market decline right before you're ready to retire and then discover that you don't have enough money to purchase that crucial annuity," he stated.

How can I balance the risks and rewards of investing?

Your pension may be required to cover a retirement that could last three decades (or longer) if you plan to stay invested and concentrate on drawdown, taking regular withdrawals from your pension investment portfolio, especially if you are in good health.

Unless you have a sizable pension fund and other assets to fund your retirement, de-risking too soon by shifting into low-return assets is risky in this situation, according to Hollands.

"To make sure the pension pot is not depleted too quickly and eroded in real terms by inflation, you will probably need to continue investing in the pension, at least in the early years of retirement," he continued.

The wealth manager Six Degrees was co-founded by Ollie Saiman, who has multi-million pound business owners as clients. The average age of these clients is forty-six. He stated that "the question of when to de-risk is very real" because many people are considering what their next phase of life will entail, but they are not necessarily planning to retire anytime soon.

Customers underestimating their life expectancy is one of the largest hazards Saiman observes. The risk of running out of money later in life may increase as a result of taking on less investment risk than necessary.

He stated that average life expectancy statistics frequently conceal the extremes and that women, in particular, tend to underestimate their longevity by ten years or more.

Early de-risking may seem wise, he admitted, but it can actually subtly jeopardize long-term financial stability.

The key, according to Saiman, is striking a balance between inflation-beating returns and a manageable amount of volatility, and that balance is largely determined by when you need to begin taking benefits from your pension.

In Saiman's experience, it is uncommon for people to need to take out sizable sums of money right after they retire.

He stated, "We're seeing more people in their 50s and 60s continuing to earn, through advisory and non-executive positions, part-time roles, or fractional work." Therefore, for at least the first ten years of retirement, pensions are frequently used to augment income rather than completely replace it.

It is also important to keep in mind that the tax-free 25% lump sum for the pension commencement does not have to be taken all at once. More of your pension can stay invested and have an opportunity to grow if you choose to take the tax-free lump sum in installments.

Says Saiman: "To put it plainly, most clients can afford to maintain a significant allocation to stocks for a longer period of time and have a greater capacity for risk in their pension than they presume.

In my fifties, how should I invest my pension?

Like the majority of financial advising companies, Evelyn Partners bases portfolio construction on risk tolerance rather than age.

With stocks still making up the majority of a portfolio, Hollands stated that an individual ten years before retirement might normally be invested in the company's risk strategies four or five (see below).

Portfolio number four would be considered balanced, and portfolio number five would be considered medium risk growth.

Equity exposure is the primary swing factor in Evelyn's core risk models, which range from one (defensive) to seven (maximum growth).

Three quarters of Six Degrees clients' pensions are invested in 70% or more stocks, which is a growth strategy.

60% of the quarter is devoted to stocks, indicating a well-rounded approach. Everyone is invested in index funds, which include cash only, fixed income, and stocks.

As Hollands noted, a large number of people's pensions will be in workplace default funds, which are one-size-fits-all funds that might not be the best option for people nearing retirement who want to enter drawdown.

In your fifties, he said, "it can make a lot of sense to combine legacy pension pots into a self-invested personal pension (SIPP) portfolio that can be tailored to your unique situation."

According to Saiman, avoiding significant, one-time withdrawals is a good strategy to lower risk when managing a SIPP. Alternatively, retirees can spread out their annual income requirements into smaller, more frequent withdrawals.

With this strategy, you're essentially averaging out of the market as opposed to being exposed to a single market moment. He stated that it can considerably lessen the effect of transient volatility on long-term results.

"Especially in those first critical years of retirement, when compounding works in reverse," he continued, "this method of managing what is known as sequencing risk helps preserve the integrity of the portfolio."