How can I diversify my pension savings in a risk-averse way?


I have been running a Drawdown Pension for the last 7 years, but as time goes on I am more and more risk averse and have moved out of Funds and individual equitys.

I have been looking at Gilts, more specifically War Loan 3.5% which currently is trading with a yield of about 4.3%. I have £290,000 currently in the pot and draw approx £9,000 per annum, but have the potential to double that with the new 120% rule. I would like to more or less match my growth with the amount drawn.

I am 66 and my wife is 61 but has no personal pension of her own.  We have no debt and have a house valued circa £280,000. I have no idea if the liquidity of this gilt would allow such an action.

I realise DMO could call the War Loan which would give a tax free capital gain but in the interim can you see a reason not to invest all or most of the fund in that guaranteed area?

Any ideas of other risk free alternatives would be a help to compare, I have also looked at Preference shares but they look too risky. I wish to make this cash work, but my SIPP provider does not allow access to external banks or building socs.  We also have about £140,000 invested with various BS yielding between 4% and 3.5% over 5 years all within the £85,000 guarantee.

Ben answers:-

“This is an interesting enquiry. The traditional approach for someone your age would be a diversified portfolio of assets, given the potential investment horizon of around 20 years, should you live to your expected age.

Without knowing anything about your health status, I can’t comment on the suitability of the drawdown arrangement. Regarding the War Loan 3.5% gilt you mention, I feel that investing all of your pension pot into this would introduce risks to your pension and wider retirement planning that you may find unpalatable.

For example, the War Loan 3.5% is extremely sensitive to inflation, and has traded as low as 30p in the pound, currently sitting at around 82p / £.

Rising inflation and rising interest rates would bring down the capital value of the gilt, and putting all of your eggs in this particular basket would be unwise to say the least.

Lack of diversification and heavily correlated portfolios are the two most likely reasons for poor performance and volatility in the short and medium term. I would advocate the services of a Chartered Financial Planner who would be able to assist you further.”

Pin It