With the new pension freedoms legislation now firmly part of the retirement planning landscape in the UK, the true implications of these changes are now starting to be truly understood.
What is clear in our day-to-day work with clients’, is that the pension investment landscape (that is, the investment funds that we hold within our pensions) has not quite caught up with the reality of this brave new world.
For a start, we come across clients who are invested in so called ‘lifestyle’ funds on an almost daily basis. These investment strategies gradually pull people out of ‘risk assets’ such as equities and property and move them into ‘safer assets’ such as cash and bonds as they approach retirement.
The problem with this strategy is that it is entirely founded on the basis that most people purchased an annuity at the end of their working life. As such, the funds would be de-risked as the day of retirement approached. The intention being that there would be less risk of the fund falling sharply in value shortly before annuity purchase, when there would be insufficient time to make back any losses.
While this strategy was sound in a world where a good majority of people bought an annuity with their retirement savings, since the introduction of pension freedoms, this appears to be far less common. The figures vary but annuity sales have almost certainly had a significant fall, with one major provider reporting a 75% drop since the pension freedoms announcement. This leads us to the conclusion that many more people are choosing to draw an income from their fund, otherwise known as Flexi-access drawdown.
If someone is invested in a lifestyle fund, but then decides to take an income from the fund over the coming years, rather than purchase an annuity, the investments could have been pulled out of ‘growth assets’ just when growth is needed the most.
If the Flexi-access drawdown option is chosen, a shift of investment thinking is required as the pension funds accumulated will remain invested, possibly for the next 20, 30 or even 40 years. As such, we would suggest that anyone thinking of taking an income from their pension fund directly, rather than purchase an annuity, seriously consider how appropriate the investments held within their pensions are.
It could well be that the perfect investment strategy in the ‘old’ pension world, leads to the perfect storm in the new one.
We also come across many people who review and manage their other investments on an almost daily basis, but who have not reviewed their pension investments for 20 years or more. The days of the pension being a ‘set and forget’ investment could now be truly behind us and we would encourage people to consider pension investments as active, just like any other.
In the next article, we will look at how the consistency of returns is now more important than ever in the new pension landscape.
If you would like to speak to a financial adviser, please email [email protected] or call on 0203 478 2160.