News
For those with invested pensions, it is crucial to understand exactly how your funds are invested. This can be particularly important as you move closer to retirement, as your plans for accessing benefits will impact the level of investment risk that is suitable.
The introduction of Pension Freedoms legislation in 2015 means that you no longer have to use your pension to purchase an annuity (a guaranteed income for life). In addition to annuity, a range of other access options are available. For instance, you are now able to draw flexible income/capital payments from a pension, leaving the remainder invested, under the flexi-access drawdown option.
Some providers offer ‘lifestyle’ investment funds which are designed to reduce in risk as you approach your selected retirement date. These are typically aimed at those targeting an annuity purchase or full lump sum withdrawal at retirement, to try and reduce investment volatility and large swings in value leading up to this. This is usually done by switching from higher risk assets such as equity (stocks & shares) investment to holding more in fixed-interest securities (e.g. gilts/Government bonds).
Lifestyle funds are not suitable for all investors. However, they can often be the default investment approach for a pension arrangement. For those looking to defer pension access at retirement, or access their benefits in stages, lowering the level of risk may not be appropriate. For instance, if there is no intention to ever access the funds, a higher level of risk might be suitable to aim for a higher long-term return.
Recent performance of some lifestyle funds highlights the risk of investing in this type of fund where there is no real need to do so. As interest rates are on the rise, gilt prices have typically fallen. This has skewed the performance of some funds that are weighted heavily in fixed-interest securities, with some experiencing large falls despite intending to be low-risk. Whilst this is less than ideal for those who are aiming to reduce the risk of their portfolio near retirement, it is unnecessary and counterproductive for those who have no need to lower the risk level. The position is worse for those who have a need to take a high level of risk to meet their objectives.
In short, your investment choices will be specific to your personal circumstances and long-term objectives; it can be difficult to try and fit these into a ‘one size fits all’, lifestyle approach.
In assessing an individual’s risk profile, we consider risk based on three elements:
- Your tolerance – essentially, how you feel about risk.
- Your capacity – how much risk you can afford to take.
- Your need – the level of risk you need to take to try and meet your objectives.
Each of the above will impact the level of risk that is suitable, which is personal to an individual and subject to change as needs and goals develop over time. As such, it is important that the risk level of a portfolio and the suitability of this are kept under regular review, which is a key part of our ongoing service.
If you would like to discuss any of the above further, please don’t hesitate to contact a member of the team.
*Please note that the above should not be taken as advice and is intended for information purposes only. We would always recommend speaking with a financial adviser about your pension options/planning before taking any action.
