Attitude to risk
Generating an income in retirement involves deciding on options where a degree of risk might be appropriate in order to enhance the potential returns you can obtain.
If you decide, instead of optiong for an annuity, to keep the pension fund invested and draw an icome directly from it, you need to decide on asset allocation within the pension wrapper which needs to be commensurate with your attitude to investment risk.
Examples of investment fund and product risk ratings:
| Rating | Risk Profile | Product type |
|---|---|---|
| 20 | Highly Speculative | Futures and Options |
| Unquoted Stock | ||
| 17-19 | High | Venture Capital Trusts |
| Single Company Stock | ||
| Emerging Markets Funds | ||
| Specialist Funds (Technology, Healthcare) | ||
| Far East (exc Japan) Funds | ||
| 13-16 | Medium High | Japanese Funds |
| UK Smaller Companies | ||
| North American Funds | ||
| European Equity Funds | ||
| International Funds | ||
| 9-12 | Medium | UK All Companies |
| UK Equity Income Funds | ||
| Managed Funds | ||
| With Profits Funds | ||
| Tracker Funds | ||
| 5-8 | Medium Low | Cautious Managed Funds |
| Property Funds | ||
| UK Equity & Bond Income funds | ||
| 1-4 | Low | UK Corporate Bond funds |
| Gilt and Fixed Interest funds | ||
| National Savings | ||
| Deposit Accounts (including cash) |
An individual with a risk profile of 1-6 would be better suited with an annuity since this is guaranteed and contains no risk of declining in line with investment market volatility. For income drawdown, with profit and unit linked annuities, your risk tolerance should be at least medium risk. If the underlying assets within these investment vehicles is more risky, your risk profile should reflect this asset allocation.