Early in an investing life, a market downturn is largely an inconvenience — there is time for a portfolio to recover before the money is needed. Close to retirement, the same downturn can be far more consequential, since there is less time to recover before income needs to be drawn. This is the reasoning behind gradually shifting, or "de-risking", a portfolio from equities towards bonds and other lower-volatility assets as retirement approaches — a widely discussed but often misunderstood part of long-term portfolio planning.
Why de-risking is discussed at all
Equities have historically delivered higher long-term returns than bonds or cash, but with significantly more volatility along the way. An investor decades from retirement can typically afford to ride out a severe downturn, since there is time for markets to recover and for further contributions to buy assets at lower prices. As retirement nears, this changes: a large fall in equity values shortly before or during the early years of retirement can be much harder to recover from, particularly once an investor starts drawing an income, a problem often discussed under the heading of sequencing risk.
The traditional "lifestyling" approach
Many older pension schemes automatically apply a strategy known as "lifestyling", which gradually and mechanically shifts a pension portfolio from equities into bonds and cash over a fixed number of years before a chosen retirement date — commonly the final five to ten years.
Strengths of lifestyling
- It is automatic, requiring no active decisions from the investor.
- It systematically reduces exposure to a severe market fall occurring just before retirement.
Weaknesses of lifestyling
- It assumes a fixed retirement date, which many people no longer have — increasingly, people work part-time, retire gradually, or delay retirement.
- It does not account for whether the pension will actually be used to buy an annuity (where de-risking towards bonds makes clear sense, since annuity prices are linked to bond yields) or used for drawdown, where a retiree may remain invested for another 20–30 years and still need meaningful growth exposure.
- A rigid schedule takes no account of market conditions at the time — de-risking into a market downturn, for instance, can lock in falls that might otherwise have recovered given time.
De-risking for drawdown versus an annuity
This distinction matters considerably. If a pension will be used to purchase an annuity at a known date, shifting steadily into bonds ahead of that date reduces the risk of the pension pot's value diverging sharply from annuity prices, which move with bond yields. If, however, the pension will remain invested through a long drawdown retirement — commonly 20 years or more — de-risking too aggressively too early can leave a portfolio without enough growth potential to sustain decades of withdrawals, a risk sometimes described as running out of growth rather than running out of caution.
| Retirement route | Case for de-risking | Risk of de-risking too much |
|---|---|---|
| Buying an annuity | Strong — protects the pot's value relative to annuity pricing | Low — the pot is converted to a fixed income regardless |
| Drawdown (staying invested) | Moderate — reduces sequencing risk in early retirement years | Higher — pot may need to sustain decades of withdrawals and inflation-adjusted growth |
A more gradual, flexible approach
Many contemporary approaches favour a gradual, ongoing adjustment rather than a fixed mechanical schedule:
- Reviewing the equity/bond split periodically from perhaps ten to fifteen years before an expected retirement date, adjusting gradually rather than all at once.
- Maintaining a meaningful equity allocation well into retirement for drawdown investors, since a portfolio expected to last decades still benefits from long-term growth exposure.
- Building a cash or short-term bond "buffer" covering one to three years of anticipated withdrawals, so that a market downturn does not force selling equities at depressed prices to fund income needs.
- Reassessing the plan if retirement timing itself changes, rather than sticking rigidly to an original schedule set years earlier.
An illustrative glide path
| Years to retirement | Illustrative equity allocation | Illustrative bond/cash allocation |
|---|---|---|
| 15+ years | 80–90% | 10–20% |
| 10 years | 70–80% | 20–30% |
| 5 years | 55–70% | 30–45% |
| At retirement (drawdown) | 40–60% | 40–60%, including a cash buffer |
These figures are illustrative only, not a recommendation, and the appropriate mix depends heavily on an individual's other resources, State Pension entitlement, and capacity for loss.
De-risking within different account types
Where an investor holds both a SIPP and a Stocks and Shares ISA approaching retirement, de-risking decisions can be coordinated across both rather than duplicated identically in each. Since ISA withdrawals are entirely free of income tax, some retirees plan to draw more heavily from ISA holdings in the earlier years of retirement, allowing the SIPP more time to remain invested at a slightly higher equity weighting before it is drawn upon — though this needs to be balanced against not depleting the ISA prematurely and losing its ongoing tax-free wrapper benefit for the remaining SIPP assets. There is no single correct sequencing for drawing from different account types, and the right approach depends on an individual's specific tax position, other income sources, and total wealth held across each account.
The tax-free pension lump sum
Most UK pensions allow a tax-free lump sum to be taken, subject to relevant limits and rules, which can itself function as a form of de-risking — moving a portion of pension wealth out of continued market exposure at the point of accessing the pension, rather than the fund's allocation being the only mechanism by which risk is reduced at retirement. How and when this tax-free element is used is a decision worth reviewing carefully alongside the invested portfolio's own equity/bond allocation, since the two interact.
Reviewing rather than automating the decision entirely
Given the limitations of rigid lifestyling discussed above, many contemporary pension providers now offer a choice between an automated de-risking pathway and full manual control over the allocation, allowing an investor to opt out of automatic lifestyling if their circumstances — such as a planned drawdown retirement rather than an annuity purchase — make the default schedule inappropriate. Reviewing which option applies by default to a workplace pension, and actively deciding whether it suits your own plans, is a worthwhile step well before the automatic de-risking schedule would otherwise begin.
A worked example
Suppose a hypothetical investor, aged 50, holds a £250,000 SIPP currently allocated 85% equities and 15% bonds, and plans to move into a flexible drawdown arrangement at age 65 rather than buying an annuity. Rather than mechanically shifting entirely to bonds by 65, they might gradually increase the bond and cash allocation over the following fifteen years, reaching perhaps 50% equities and 50% bonds and cash by retirement — including building a cash buffer covering two to three years of anticipated withdrawals by the time they start drawing an income — while retaining meaningful equity exposure throughout retirement to support decades of further withdrawals and to help the pot keep pace with inflation.
Behavioural reasons de-risking is sometimes delayed too long
It is worth acknowledging that de-risking decisions are not purely mathematical — they are also behavioural. Some investors, having become comfortable with a higher equity allocation and its accompanying long-term growth over many years, find it psychologically difficult to reduce that allocation even as retirement approaches, partly out of reluctance to "give up" future growth potential. Others swing to the opposite extreme, de-risking far earlier and more aggressively than their actual circumstances require, out of general anxiety about retirement rather than a considered assessment of their specific capacity for loss. Recognising these tendencies in oneself, and referring back to a written plan made in advance rather than a reaction to recent market news, can help keep the de-risking decision grounded in actual circumstances rather than emotion.
Key considerations before de-risking
- Whether the pension will be used for an annuity or drawdown significantly changes how aggressively to de-risk.
- Other sources of retirement income, including the State Pension (whose age varies by date of birth and should be checked individually) and any defined benefit pension, reduce reliance on the invested portfolio and may support holding more equities for longer.
- A rigid, calendar-driven de-risking schedule can lock in losses if it coincides with a market downturn — a more flexible, reviewed approach avoids this.
- Carried-forward pension annual allowance rules (up to £60,000 a year, or 100% of earnings if lower, with three years' carry-forward available) are separate from the de-risking decision but worth keeping in mind when planning contributions in the run-up to retirement.
Documenting the plan
Given how much judgement is involved in deciding the pace and extent of de-risking, writing down the intended approach — including the target allocation at various stages, the reasoning behind it, and the circumstances under which it might be revisited — provides a useful reference point to return to during periods of market stress or uncertainty, when the temptation to deviate from a considered plan in either direction tends to be strongest.
Key takeaways
- De-risking means gradually shifting a portfolio from equities towards bonds and cash as retirement approaches, reducing exposure to a severe market fall at a vulnerable time.
- Traditional "lifestyling" applies this mechanically and assumes a fixed retirement date and annuity purchase, which suits fewer investors than it once did.
- Drawdown investors, who may remain invested for decades in retirement, generally need to retain more growth exposure than someone buying an annuity.
- A cash or short-term bond buffer covering a few years of withdrawals can reduce the need to sell equities at a bad time.
- A flexible, periodically reviewed approach is generally considered more robust than a rigid mechanical schedule.
- Always check current HMRC and FCA figures and allowances, as these change from tax year to tax year.