This article is part of our Guide to Maximising Your Pension, helping investors build up the maximum possible pension pot – and turn it into the maximum possible retirement income.
Are lifestyle funds obsolete? Lifestyling may sound like the latest diet fad from across the pond, but in fact it’s the act of de-risking your pension portfolio as you approach retirement age. Before pension freedoms were introduced in April 2015, buying an annuity when you reached retirement was compulsory for most workers. In order to make this process as seamless as possible, the pension provider matched the underlying assets of your savings scheme with those found in an annuity basket – namely low risk government bonds and cash alternatives.
Annuity rates were indeed linked to the 15-year gilt yield, which in June 2008 was 5.11% - not an unattractive proposition at retirement. But in these days of low interest rates a 15 year gilt yields just 1.95%, and as annuitisation is no longer compulsory lifestyling is not just unattractive but you could argue has no place at all pension planning.
Except, your financial situation does still change significantly at retirement, even if you no longer have to buy a bag of old bonds.
Claire Finn, head of Strategic Partnerships and DC Investments for BlackRock, said that while the line between pre-retirement and post-retirement had been blurred, it was still important to prepare your investment portfolio for a time when you will not be receiving an income from your employer.
“Lifestyling is not dead, but it does need to adjust. You do not want to create a portfolio which is so unsuitable for retirement that you face a shedload of fees for switching your assets at a time when you have no money coming into your portfolio,” she warned.
“I particularly like multi-asset growth funds for this stage, which include volatility control. Flexible fixed income funds and absolute return funds are also appropriate for the run up to retirement.”
Finn also points out that many people do still buy an annuity – 31% of the market according to the latest figures from the Association of British Insurers – and that this figure will probably increase. And while interest rates have been slow to rise, over time they will revert to historical levels, making an annuity a more attractive option.
“Currently many people retiring have defined benefit schemes which guarantee them an income for life as well as defined contribution schemes which in the past you would have to annuitise. These people will cash in their DC scheme and self-invest as they have their DB scheme to fall back on,” she explained. “As time goes on, there will be fewer and fewer DB members, as the schemes are closing, meaning the annuity is the only option for those that want an income for life.”
Maximise Your Contributions Now
Just because you are de-risking, doesn’t mean you should stop contributing however. The decade before retirement is the last 10 years you have to grow your pension pot; the time to boost your capital to the absolute maximum before spending up to four decades depleting it.
Consolidation can be a good way to do this – although Finn warns you could incur fees for selling out of a particular pension which would be detrimental to gains. If you have taken early retirement but are still able to contribute to your pension through other savings and investments, do so. Not all schemes allow this, but many do, and you can benefit from 20% tax relief on the first £2,880.
“It is not personalised portfolio management but there are some big advantages to continuing contributions to your workplace pension,” says Finn. “You get professional oversight and economies of scale, allowing you access to certain assets not available to retail investors.”
If you have maximised your annual and lifetime pension allowances, you should make sure you use up your annual ISA allowance too.
