Investment timing is vital as retirement nears

It's all very well to understand that pensions are part of a long-term game, and that a dive in the stock market today could be balanced by a leap upwards next year, but such knowledge would still make cold comfort if you were due to retire tomorrow and were relying on equities to fund your golden years.

For one thing, the past few months would have been nerve-racking, with each new day throwing up another threat to your equity-linked prosperity. Over the year to June, for example, you would have seen an average 14.3 per cent wiped off your pension fund's return. There goes the villa in Spain.

Happily for most pensioners, this depressing situation does not generally arise in practice, at least in the more mainstream pension funds.

The luckiest ones of all are those individuals who participate in defined-benefit or "final salary" pension schemes. This group, which covers 68 per cent of Irish workers involved in any kind of occupational pension, need, in theory at least, pay no heed to stock markets and their drivers, since their employer has undertaken to provide them with a certain level of benefit regardless of how the global economy may perform.

Even here, however, weak equity markets can make their presence felt. Pensioners in this class, who have opted to make additional voluntary contributions (AVCs) to their funds, will usually have exposure to a managed fund and, hence, the equity markets.

On retirement, they will have the option to soothe any pain felt by transferring this money into an Approved Retirement Fund (ARF) and thus retaining equity exposure until the market perks up again. The downside of this is that it will attract a tax liability, which could, in some cases, cancel out the benefit of continued investment.

Another potential concern is that the employer providing the defined-benefit cover may need to top up their pension fund if unfortunate equity investments cause a significant dent therein. Naturally, this will divert resources that could otherwise have been dedicated to alternative company expenditure that could benefit employees, such as incentive schemes, for example. This situation recently led British pharmacy chain, Boots, to switch its entire £2.3 billion sterling (€3.6 billion) pension fund from equities to bonds so that returns could be guaranteed.

As for the defined-contribution people - the ones who bear the risk in their pensions investment - the consequences of an equity downturn at the time of retirement could be severe. Again, however, the practice is usually less harsh, with most such funds shifting members from equities to less-risky assets as they get closer to retirement.

This means that a worker who is 10 years off retirement will be encouraged to place more money in bonds and cash than in equities or property. The process will be conducted on a progressive basis, thus smoothing out the effects of a significant hit in any one asset class.

Those holding private pensions will generally be encouraged to approach the matter in the same way, although whether they agree to the implicit limits on returns or not is another matter.

Finally, at the rough edge of it all, there is always the unlucky pensioner who is forced to retire unexpectedly and has no option but to take what he can and run. This poor unfortunate could, for the sake of argument, be a worker aged 50 who, in normal circumstances, would have been expected to work for another 15 or even 20 years. For them, the process of transferring retirement assets into more secure classes may not yet have begun and they will be left bearing the brunt of one of the century's deepest equity troughs for the rest of their lives.

As with all market-related investments, timing can be your best friend or your worst enemy.