If you are getting close to retirement there may be a ticking time bomb at the heart of your pension that requires urgent attention.
Hundreds of thousands of savers have had their pension investments rendered obsolete at a stroke by the new pension freedoms. These plans now need drastic modernisation.
The problem concerns company pension schemes and their attempts to make savers’ funds less risky in the run-up to retirement. Many schemes start moving members’ money out of shares and into bonds about 10 years before the expected retirement date.
This was a sensible strategy when bonds were a safe, boring investment and when everyone bought an annuity on the day they retired. But the new pension freedoms mean many will hang on to their funds after retirement, while bond prices have risen so far that a correction seems likely.
Savers are being urged to give their pension funds an urgent health check to find out whether they are in one of these arrangements. We explain how to find out – and what to do if you are.
Do I have one of these outdated pensions?
Pension funds that gradually switch money from shares are called “lifestyle” funds (or “annuity protector” or “pre-retirement” funds). You can find out if your company pension is in one of these funds by calling the scheme administrators.
Should I definitely switch?
Lifestyle funds are not right for people who want to leave their pension funds invested after retirement, experts say. But, in theory, they could still be suited to people who do want to buy an annuity and those who plan to withdraw most or all of their money quickly under the new freedoms.
However, the reliance of lifestyle funds on bonds may mean that even these savers should look for funds that use alternative “safe” assets, such as cash.
How do I move my money out of a lifestyle fund?
Broadly speaking, savers have three options. The first is to stick with your existing workplace pension provider and move your money into another of its investment funds.
If this is not possible, you could move your money to a personal pension, which will offer a relatively small number of choices about how to invest your money. Patrick Connolly, a financial adviser at Chase de Vere, recommended Standard Life’s Active Money personal pension, the Scottish Life Pension Portfolio or the Aviva Personal Pension. Alternatively, if you are happy to get more involved in managing your retirement savings, you could opt for a self-invested personal pension (Sipp). Sipps offer a wide range of choice of funds, as well as more unusual assets such as commercial property.
Once I move my money, how should I invest it?
Whether you stick with the funds offered by your company pension or switch to a personal pension or Sipp, it’s vital to put your money in the right funds.
Here we look at some possible choices for three scenarios.
1. Withdrawing all your pension money as quickly as possible
On retirement In these circumstances, ditching your lifestyle fund should not be an automatic choice. However, given the outlook for bonds, Scott Gallacher, a chartered financial planner at Rowley Turton, recommended moving into cash.
2. Ad hoc withdrawals
The key is to have some money in cash so you are not forced to sell investments when you need money from your pensions. If stock markets happened to be low when you wanted to make the withdrawal, you would have to sell more of your assets to realise a given sum. For the rest, many advisers tip simple, diversified “tracker” funds such as one of the Vanguard LifeStrategy funds. Actively managed alternatives include Fundsmith Equity. See more fund tips at telegraph.co.uk/isas.
3. Income to last for life
Funds that buy reliable dividend-paying British and global shares are seen as a good option. Bond funds would normally be a popular choice, although returns are currently low.
Funds often recommended by advisers include Woodford Equity Income, JO Hambro UK Equity Income and the City of London investment trust – or, for global exposure, Artemis Global Income and the Murray International Trust.
Alternatively, you can employ the services of a professional “fund picker” by choosing a “multi-manager” fund. Advisers’ choices include F&C Multi-Manager Navigator Distribution, Schroder Multi-Manager Diversity and Jupiter Merlin Income.
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