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Lifestyle Funds

September 2016 - Issue 2

Comment from a contact

Stephen Franklin, ECFS

 

If, like most people you were a long time away from retirement when you started your first pension it may be time to review your policies.  If your pension funds use “lifestyling” methodology they may not be the best fit for you.

Lifestyle funds adjust their assets based on  the current age and expected retirement age of the investor.  At the beginning, the fund invests in ‘riskier’ assets such as stocks and equities as an attempt to build up as much capital as possible at a time you could afford to tolerate a market downturn.  The closer you get to retirement, the more the fund reallocates assets to ‘safer’ investments such as bonds and cash.  The goal is keeping your pension’s value protected from market shocks so you can have a decent fixed income from an annuity.

There are a lot of assumptions and presumptions going on here. Firstly, the fund managers assume younger investors have a more adventurous attitude to risk, but will be cautious at 65. This is quite an overarching theory that doesn’t take into account the amount of money invested; you may be more adventurous with a pension making up 15% of your overall financial plan, than you would be with a modest, sole pension pot.

Secondly, there is the presumption that not only will you retire at 65, but you’ll know it for certain on the day you open your pension. However, the average 65 year old man in the UK is now predicted to live until he is 84. At his birth in 1951, he was only predicted to reach 65.68 years of age.  With such a dramatic change in life expectancy, we can surely expect similar changes in goals and lifestyles. Let’s suppose the assets in your lifestyle pension fund begin moving into cash at 55 and you don’t need to touch the pot until you’re 70.  That’s 15 years of lost growth opportunity.  Adding in the stagnation of cash assets with annual fund charges of up to 1% eroding the real value even before the effects of inflation it’s more likely your pension “pot” will decrease in value over that time if the underlying fund is cash.

The third assumption is that you’ll use your pension to buy an annuity; you’ll exchange your pension pot for a fixed, guaranteed income for the rest of your life.  If you are a passive, cautious investor who expects to live for another 19 years after retirement, this will seem like an attractive option.  But it’s just that – an option. Lifestyle funds were introduced in the 1990s when you would only save your pension to buy an annuity.  However, with the introduction of pension freedoms in April 2015, you have several other choices.

If you would like to explore any pension matters further, speak to an Independent Financial Adviser.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, views or policy of Prettys LLP.

Stephen Franklin

Senior Adviser

ECFS Independent Financial Advisers

T: 01245 294900
sfranklin@ecfsltd.co.uk

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