The government’s changes to pension rules – pensions freedom, as it’s been called – have been in force for a while. You can now do pretty much what you want with your pension when you turn 55, with no need to buy an annuity (an income for life). That has a number of implications for retirement planning – one of which is to make the fact that £100bn of pension money is still sitting in “lifestyle” funds look problematic.
Lifestyle, or target-date, funds are a popular option for workplace pensions – they account for around 85% of them, estimates the Pensions Policy Institute. The idea is that they invest in riskier, high-growth assets (equities) when the investor is young, and shift towards taking less risk (bonds and cash) in the approach to retirement.
This was a reasonable idea in the past. If you were on track to trade your pension pot for an annuity on a specific date, the last thing you wanted was for your pension pot to suffer a 2008-style collapse the day before you cashed it in. But since pensions freedom, the benefits are less clear. That’s because everyone now has a different retirement profile. Some will still want to buy an annuity.
But others will want to stay invested well into retirement, with the aim of generating a regular income or making ad-hoc withdrawals. If you’re one of the latter, it might not make sense to reduce risk as sharply as in the past.
Depending on how much money you plan to withdraw, you could easily reach 55 with another ten to 20 years to go before you plan to make any serious demands on your pension pot. If it ends up sitting mostly in bonds and cash, you could waste some of the best years of potential investment growth.
For example, consumer group Which? calculates that a shift from equities into gilts and cash over the decade before your retirement could leave you with 19% less (on average) than if your pension remained in shares the whole time. And this doesn’t even touch on the question of just how “safe” the increasingly expensive bond market is. If interest rates start to rise, “investors could find themselves nursing losses just as they are about to hit retirement”, as Hargreaves Landsown’s Laith Khalaf told Money Observer.
Many providers have been working to update their default funds. This week, Scottish Widows said it would switch workplace pension customers into a “pension-freedoms-friendly default fund” by the end of 2016.
But providers can’t simply change the way customers are invested without their permission. So if you receive a letter from your provider, don’t ignore it. And if you’re worried that you may be invested in an inappropriate fund, contact your provider or speak to your employer to find out more about their plans for your pot.