You are somewhere between fifty and sixty-eight. The stop-work date is no longer theoretical. A recommendation lands on the table, and it rests on a risk label: medium, balanced, growth, cautious. The label is doing a lot of work. It is standing in for at least three different questions, and your job before you sign anything is to make sure the file answers each of them separately.
This is not an argument that advisers hide things. It is an argument that a single word is a summary, and summaries lose information. The information they lose is usually the part that matters most at the point you stop earning.
The three questions behind the label
Strip away the vocabulary and there are three distinct questions.
What are you willing to risk? This is your tolerance. It is a preference, and it is partly emotional. It shows up in how you answer questions about volatility, and in how you actually behave when markets fall. It is not a measure of what you can afford.
What can your finances absorb? This is your ability to bear losses, sometimes called capacity. It is arithmetic, not feeling. It depends on your income, your assets, your commitments, and how much of your spending depends on the money that is invested.
What return does the plan actually need? This is the risk required. It is the least discussed of the three and often the most decisive. If your bridge to State Pension age is short and your essential spending is covered by a defined benefit pension, the plan may need very little investment risk to work. Taking more than that is not prudence. It is unnecessary exposure.
The FCA’s suitability rules treat the first two as separate inputs. A firm providing investment advice must obtain information on the client’s financial situation, including their ability to bear losses, and on their investment objectives, including their risk tolerance, and must recommend only what is suitable in accordance with both. The rule does not merge them. It names them side by side. You can read the text in COBS 9A.2.1R.
The same section defines what ‘financial situation’ means. It must include, where relevant, the source and extent of regular income, assets including liquid assets, investments and real property, and regular financial commitments (COBS 9A.2.7). That is a factual inventory, not a mood. If your file records a tolerance score but no clear statement of income, assets and commitments, the ability-to-bear-losses side of the assessment is thin.
Why the third number is the one that goes missing
Tolerance and capacity are both inputs about you. Risk required is an output about the plan. It asks: given your spending, your guaranteed income, your time horizon and the bridge to State Pension age, what return does this actually need to produce?
That question is harder to put on a questionnaire. It requires a cash-flow model, or at least a clear statement of the funding gap and the years it spans. It is also the question most likely to change the answer. A couple with a large pension pot and a short bridge may need almost no growth. A couple with the same pot and a longer bridge, or a larger gap, may need more. The label can be identical in both cases.
This is where the quiet failure tends to sit. Not a wrong label, but an unexamined one. The file may contain a tolerance score and a capacity assessment, and still contain no explicit statement of the risk required to fund the plan to State Pension age. That gap is worth naming before any product is chosen.
Capacity and capacity for loss are not quite the same thing
There is a further distinction that is often flattened. Greg Davies of Oxford Risk has argued that ‘risk capacity’ and ‘capacity for loss’ are frequently used interchangeably, which he describes as a major problem leading to confusion and unsuitable advice. His argument, published in PA Adviser, is that capacity for loss is fully contained within the broader notion of risk capacity: measure risk capacity and you have measured capacity for loss as a side effect, but not the reverse.
His reasoning is that risk capacity has to account for wider financial circumstances — investible and non-investible assets, current and future cashflows, and even emotional attachments to assets like the family home. The more you rely on your investible assets to fund your lifestyle, the less risk you can take with them. Capacity for loss, by contrast, is a narrower test of whether a fall in value would materially damage your standard of living.
This is an attributed argument, not an FCA rule. But it is a useful one for a pre-retiree, because it explains why a single ‘capacity’ number can feel right and still be incomplete. The question to ask is not only ‘could I absorb a fall?’ but ‘what does the whole of my financial life — guaranteed income, property, future spending — say about how much risk these invested assets should carry?’
The FCA also expects the tools used in this process to be fit for purpose. Firms must take reasonable steps to ensure client information is reliable, including ensuring that risk assessment profiling tools are appropriately designed for the firm’s clients, with any limitations identified and actively mitigated (COBS 9A.2.9(2)(b)). That gives you a legitimate question about how the tool was used and what its limitations were. It does not give you a conclusion that it was misused.
A hypothetical example: the label that overstates the need
Consider a couple, both 58, mortgage-free. One has a defined benefit pension that begins at 60 and covers their essential spending. Between them they hold £400,000 across ISAs and a SIPP. They plan to stop work at 60 and bridge two years to the DB pension, with the State Pension following later.
Their tolerance might reasonably be called medium. Their ability to bear losses is high, because the DB pension covers essentials from 60 and the home is owned outright. But the risk required to fund a two-year bridge is low. The plan does not need much growth to work. A single ‘medium’ label would overstate the risk the plan actually needs, and the useful conversation is about the bridge — its length, its funding, and what happens if the stop-work date moves — not about the label.
This is an illustration, not a case history. The point is structural: three numbers can point in different directions, and a single word cannot show you which direction each one points.
For couples, the three numbers can diverge between partners
A joint label is a particular risk. One partner may have low tolerance and high capacity; the other high tolerance and low capacity. A joint ‘medium’ can hide both. The audit question is whether the file records each partner’s inputs separately, and whether the recommendation reflects the household position rather than an average of two questionnaires.
The FCA’s rules on identifying the subject of a suitability assessment recognise that a client can be a group of two or more natural persons, and require the firm to establish and record a policy on who is assessed and how (COBS 9A.2.15). For a couple, that policy should be visible in the file.
Five questions to put to the adviser
These are suggested questions, not regulatory requirements. They are designed to surface whether the three inputs have been captured separately and reconciled.
- Show me where my tolerance is recorded. Ask for the specific section of the suitability report or fact-find, not a verbal summary.
- Show me where my ability to bear losses is recorded, including income, assets and commitments. If it is a score without the underlying figures, ask for the figures.
- Show me the risk required to fund my plan to State Pension age. Ask what return the plan assumes, over what period, and what happens if that return is not achieved.
- If those three disagree, how did you resolve the disagreement? A good answer will explain the trade-off. A weak answer will restate the label.
- What would change the answer? A market fall, a health event, a change in stop-work date, a change in State Pension age. The answer tells you whether the plan has been stress-tested or just labelled.
What to look for in the suitability report
The suitability report is the artefact to audit. You are not looking for a particular label. You are looking for evidence that the label was derived rather than assumed.
- A stated tolerance, with the basis for it.
- A stated ability to bear losses, with the income, assets and commitments behind it.
- A stated funding requirement — the risk required — with the time horizon and the assumed return.
- An explanation of how any conflict between the three was resolved.
- For couples, separate inputs for each partner.
If the report does not show tolerance and ability to bear losses as separate inputs, ask for them in writing before acting. If it does not show the risk required to fund the plan, that is the gap to resolve first — not a reason to change product.
The uncomfortable truth about timing
The pre-retirement years are when the three numbers are most likely to diverge, and when a single label is least able to hold them. Tolerance may fall as you approach the point where you stop earning. Capacity may rise if a DB pension or the State Pension is about to start. Risk required may fall sharply once the bridge is short. None of these movements is captured by a label that was set three years ago and reviewed annually.
This is why the question of when to stop work and how to fund the bridge deserves its own conversation, separate from the risk label. The article on the question you should be asking years before you retire sets out why that timing decision is the one that shapes everything downstream.
The Consumer Duty raises the standard firms must meet: it requires them to act to deliver good outcomes for retail customers and to put customers’ needs first (FCA). A risk label that cannot be unpacked into its component parts is hard to reconcile with that standard. Your job is not to police the firm’s compliance. It is to make sure you understand what you are agreeing to before you agree to it.
FAQ
Is ‘risk required’ an FCA term?
No. The FCA’s suitability rules require information on risk tolerance and ability to bear losses, and a recommendation suitable in accordance with both. ‘Risk required’ is a planning concept — the return the plan needs to work — not a defined regulatory input. It is still the question most likely to change the answer.
What if my tolerance and capacity point in different directions?
That is common, and it is not a problem to be hidden. The question is how the adviser resolved it and whether the resolution is recorded. A recommendation that takes more risk than your tolerance allows, or less than your capacity could support, needs an explanation you can follow.
Does a single risk label mean the adviser has done something wrong?
Not necessarily. A label is a summary, and summaries are useful. The issue is whether the file shows the inputs behind it. If it does, the label is a convenience. If it does not, the label is doing work it cannot support.
How often should the three numbers be revisited?
The FCA requires firms with an ongoing relationship to have policies and procedures to maintain adequate and up-to-date information about the client (COBS 9A.2.10). In practice, the pre-retirement years are when circumstances move fastest. A review that only restates the label is not a review of the three numbers.
What about upcoming changes to pension tax and access rules?
Changes to the tax treatment of pensions and to the minimum age at which most pension savers can access their pensions are legislated and will affect the timing and wrapper decisions around the bridge. They do not change the three-number question, but they change the answer. Any plan that assumes a stop-work date or a pension access date should be checked against the current legislated position for the relevant tax year.