Building up a pension pot is hard. But running it down can be surprisingly tricky too. The combination of investment and longevity risk makes the decumulation of pensions the “nastiest, hardest problem in finance”, according to Nobel Prize-winning economist Bill Sharpe. Worries about running out of money make retirees frugal.
US funds group Columbia Threadneedle Investments reckons the UK should follow Australia, where two-thirds of schemes do not use this “lifestyling” approach. It calculates this lower exposure to equities reduces returns by 2.3 per cent per year. There is indeed a strong case against shifting out of equities, at least in the early years of retirement.
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