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How can savers calculate their risk appetite?

By Andrew Megson, Executive Chairman, My Pension Expert

The topic of risk appetite can be troublesome. Put simply, we all have different financial needs, as well as having different attitudes towards financial risks – some individuals might be comfortable navigating high-risk assets, while others might experience a great deal of stress during market downturns.

This holds particular relevance in the context of COVID-19. The pandemic has caused a great deal of economic volatility, which in turn will have affected the value of many Britons’ pension investments.

Consequently, many savers will be revisiting their pension strategy, and potentially making some more high-risk investments. In fact, according to recent research from My Pension Expert, one in eight (13%) UK adults has already moved part or all of their pension pot into a riskier investment during the pandemic with a view to achieving a greater rate of growth.

So, those thinking about their retirement must engage in a careful balancing act, ensuring they don’t take too many risks, or alternatively, lose out to inflation.

With this all considered, where should savers start when determining their attitude towards risk?

How much can I afford to lose?

Naturally, every individual will have a different set of financial responsibilities and considerations to make when considering their investment activities.

Many of these deliberations will be practical: for example, savers must consider their financial goals and commitments, post-retirement. For many people, this might entail paying off their mortgage, or any outstanding loans, while others might have financial dependents or want to help their children get onto the property ladder. These goals will help to determine a desired rate and timeframe for the returns of any investments.

Andrew Megson

Andrew Megson

Other considerations include understanding how much an individual can afford to lose should an investment fail. For example, if a poor investment would mean that an individual was no longer able to live comfortably and struggle to pay household bills, they might want to reconsider their choices.

Finally, savers must take into account their personal attitude towards risk. So, if a person feels uncomfortable about leaving their money in an investment that is particularly sensitive to market fluctuations, they are likely to have a lower risk appetite than someone who would be happy to do so.

What types of higher-risk investments are there to consider?

It is more than likely that retirees will hear about two kinds of investment in particular when discussing higher-risk pension investments: zero/low-liquidity investments, and gated investments.

Where zero and low liquidity investments are concerned, these assets cannot be easily converted into cash without the potential for the investment losing a significant percentage of its value. This can make it very difficult for savers to access their cash, which can present issues if an individual needs to withdraw cash rapidly.

Gated investments, such as commercial property funds, can present similar problems. Despite ‘promising’ strong returns, individuals can be blocked from withdrawing their cash from an investment fund. Savers should therefore think twice before depending on such investments as a reliable source of retirement income.

The value of advice

Evidently, the world of investments and risk appetite can be incredibly complex. As such, savers should always seek independent financial advice before making any major decision about their pension investments.

A financial adviser will take into account every element of a person’s financial situation, including financial goals and attitude towards risk, in order to determine the risk profile for their financial strategy. From here, they will make the appropriate recommendations to help savers maximise their retirement savings while sticking to investment types or asset classes the client feels most comfortable with.

When all is said and done, risk appetite is subjective, and likely influenced by a variety of individual factors, as well as current affairs and the wider economy. Nobody enjoys the thought of losing money, but some people will be more comfortable with the prospect of taking the market highs with the lows.

Of course, all investments carry an element of risk. However, consulting an adviser will ensure savers are able to make informed decisions about their pension investments without taking on unnecessary risk.

Andrew Megson is the Executive Chairman of My Pension Expert, the UK’s number one Advised Retirement Income Specialist. Founded in 2010, My Pension Expert specialises in providing independent advice to UK consumers about their pension plans – it arranges millions of pounds worth of retirement income options each week.


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