Matthew Stevenson, 58, decided to review his pension holdings after being made redundant last year. He says: “I’ve got an older final salary scheme from a previous employment. This is due to pay out a decent income, around £20,000 a year, from the age of 60.”
But the firm – an insurance company based in London – recently wrote to him to say they were increasing the ‘transfer value’ of this pension. He says: “The transfer value is now more than three quarters of a million pounds. This seems like a very significant sum of money, so I wondered whether it made sense to take this lump sum and invest it instead.”
This course of action appealed – especially considering his earnings have dropped dramatically. “I am currently doing some consultancy work, but my income is less that than it was at my previous employment,” Stevenson explained. “Getting access to this cash would be attractive, but I’m not sure it is the right thing to do long-term.”
Before making this decision Stevenson sought financial advice from Chase de Vere.
He says: “I has to pay an upfront fee for this advice, but was happy to do so. As well as looking at this pension decision, I thought it would be good to get a more general review of my finances.
“I’m in a fortunate position of having options when it comes to my pensions and investments, but I want to make sure I am making the most of my money.”
Final Salary: Stick or Switch?
Chase de Vere advised him to stick with his final salary pension. They pointed out that a guaranteed inflation-linked pension would be expensive to buy elsewhere. The income paid from this pension, combined with his State Pension, should ensure Stevenson has sufficient funds to cover day to day living expenses once he retires.
Although he could release additional capital if he transferred this pension into a SIPP, Chase de Vere said that he would be better off using other savings and investments to fund home improvement or subsidise day-to-day living costs until he finds more work, or starts collecting his pension.
Stevenson has decided to leave his final salary pension untouched, but he has made some changes to his other workplace pension following this meeting.
He explains: “For the last five years I’ve contributed to a defined contribution workplace pension with my last employer. I hadn’t paid too much attention to where this money was invested, but this came up in the review. From filling out various questionnaires I also had a more detailed picture of my own attitude to risk, so have changed some of the investments within this pension plan.”
Diversifying for Long-term Growth
Stevenson was surprised to learn that 100% of this pension was invested in UK equities, mainly through passive funds. He has decided to diversify these holdings, so the fund is now invested more globally, as well as having more exposure to both the bond market and commercial property.
He says: “From talking to the advisers I have looked at re-weighting this pension. We discussed moving it to a SIPP, but as the charges remain low on this workplace pension, it seems best to leave it where it is. At the moment I am not in a position to contribute to a pension, but if my I get a bit more work I may open a SIPP then look to consolidate these holdings.”
His re-weighted pension is now 30% invested in UK equities. This is complimented by a 20% holding in US equities, a 16% holding in European shares, 5% in Japan, a further 5% in Asia, plus a 17% holding in bonds and fixed interest and a 7% holding in commercial property.
The portfolio is made up of range of passive and active funds; his workplace pension offers access to a number of externally managed funds.
Both his UK and US holdings are passive funds. This includes the HSBC FTSE 100 tracker which has a Neutral Rating from Morningstar analysts.
Morningstar’s Hortense Bioy says: “The FTSE 100 may be a widely followed benchmark, often cited as a proxy for the UK stock market, but it is not a compelling long-term investment proposition. The index is concentrated in giant caps and leaves investors underexposed to other segments of the UK market.”
Stevenson also invests in the more highly-rated Vanguard US Equity Index fund. This has a Gold Rating from Morningstar analysts, and a five-star performance rating, reflecting its strength compared to peers.
Monika Dutt, an analyst at Morningstar says: “We have maintained a Morningstar Analyst Rating of Gold for this fund. It is difficult for active managers to outperform US large-cap benchmarks, so taking a passive investment approach to this asset class makes a lot of sense.
“This index-tracker provides a very low-cost, one-stop solution to gain access to US equities. At 0.1%, the fund’s ongoing charge is highly competitive relative to the US large-blend equity Morningstar Category.”
Active Funds in a Pension Portfolio
Stevenson has switched to actively managed funds in other sectors. These include the First State Asian Growth fund, a Silver Rated fund that also has a five-star performance rating.
Morningstar analyst Mark Laidlaw describes this fund “a strong all-rounder” that is managed by an experienced team. The manager Richard Jones has been at the helm since 2010, and has built up an impressive track record.
Laidlaw says: “Trailing returns for First State Asian Growth are top-quartile over one and three years annualised up to the end of June 2016, and top decile over five and 10 years annualised.”
Stevenson has also invested in the Invesco Perpetual Corporate Bond fund.
This Invesco Perpetual fund has a coveted Gold Rating from Morningstar analysts. It is run by Paul Read and Paul Causer who have successfully run this fund since its launch in 1995. Michael Matthews has also been a co-manager on the fund from 2013.
Morningstar analyst Carlos Lucar says: “Bolstered by exceptionally stable managers, this fund continues to thrive. The managers are supported by a focused but experienced and growing team of 12 portfolio managers and analysts.”
Lucar points out that the managers' significant personal investments in the funds that they run also strengthen the alignment of their interests with those of investors.
Finding a Cash Account that Pays
Stevenson says that most of his investments are in his pension. He adds: “I do have some cash savings, which until now have been earning next to no interest. But we have had an offset mortgage for a number of years, so they have reduced the interest paid on my home loan.”
He adds: “With the redundancy money the mortgage has been largely paid off. On the advice of Chase de Vere I am going to move these additional cash savings from the offset account into a Cash ISA. The returns are pretty low, but I’m better off getting 0.5% on my money than the zero percent these savings are currently earning with First Direct.”
Stevenson said he was happy for his pension funds to remain invested, and would rather these “rainy day savings” were not at risk.
“We are looking to make a few home improvements, so I intend to use my cash savings first and leave the pension funds untouched for as long as possible,” he said.
