Pension Funds - impact of new rules on lifestyle funds

edited 30 October 2014 at 10:22AM in Pensions, Annuities & Retirement Planning
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RobStaffsRobStaffs Forumite
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I have a lifestyle fund with AEGON. My pension broker is suggesting these as these type of funds where more suited to those who intended to take out annuities then the impact of the new pension rules could see these type of funds declining. Not sure what to do here. He has suggested three alternatives all within my risk profile but probably less likely to be damaged by any dash for cash. I have a significant pension fund at the moment so need to think hard. I am 50 so it might be a good time to change. Any others having similar thoughts?

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  • pjreadpjread Forumite
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    Are you planning to take out an annuity...? It isn't necessarily a no-brainer to ignore the option regardless of rule changes.

    Are you dead-set on a retirement date? E.g. if you hit (lets say) 65 during a 'dip' in investment performance, would you be happy to carry on working for a couple of years longer until the investments came good?

    My understanding is roughly that these 'lifestyle' products gradually move your investments to cash/gilts/etc in the last X years to try to cushion you from a market fall. As a side effect, you're missing out on X years of potential growth. Essentially that lost growth is what you're paying for the 'insurance' of moving the pot towards low/no-risk.

    Personally I've got my pension (which I suspect is much smaller, as I'm in my 30's and as is typical was a bit silly in my 20's) in nearly 100% equities, and knowing my own risk profile I could see this continuing all the way through to drawdown and beyond - but then I have probably at least 30 years to change my mind if I mellow or e.g. if annuity rates adjust upwards to look worthwhile (I expect they should over the next 10-15 years, but then I've been wrong before!)
  • rpcrpc Forumite
    2.4K Posts
    pjread wrote: »
    My understanding is roughly that these 'lifestyle' products gradually move your investments to cash/gilts/etc in the last X years to try to cushion you from a market fall. As a side effect, you're missing out on X years of potential growth. Essentially that lost growth is what you're paying for the 'insurance' of moving the pot towards low/no-risk.

    While I can't remember the details (it is a long way off for me), I've seen some fairly in depth reading suggesting that drawdown benefits from derisking around the retirement date. There is a high sensitivity to sequence of returns risk early in drawdown, so reducing volatility for a few years either side of retirement and then adding risk back in later on gives safer outcomes. A few bad years in a row early on can mess up your whole retirement.

    Of course, without a crystal ball you can't tell what the best approach is. Stay in equities and you might retire earlier or later. Equities could crash while bonds/gilts soar or vice-versa. Who knows.

    You probably don't want a lifestyle fund that ends up in cash, but if you aren't confident in doing it yourself then you could/should get an IFA to look at it for you. Of course, the IFA may recommend an annuity as being the best fit for your circumstances...

    There are all sorts of other approaches, rather than treating your investments as a single pot. Split it into a number of pots, lifestyling each. But each pot "matures" at different times so you are only drawing from cash or low volatility investments.

    Or you can go HYP put it all in dividend shares and set up a buffer to smooth out bad years.
  • RobStaffs wrote: »
    I have a lifestyle fund with AEGON. My pension broker is suggesting these as these type of funds where more suited to those who intended to take out annuities then the impact of the new pension rules could see these type of funds declining. Not sure what to do here. He has suggested three alternatives all within my risk profile but probably less likely to be damaged by any dash for cash. I have a significant pension fund at the moment so need to think hard. I am 50 so it might be a good time to change. Any others having similar thoughts?
    You need to think about how you plan to draw your income in retirement, e.g. annuity or drawdown or a combination.

    Lifestyling is usually suitable for people with a set retirement date as it de-risks the portfolio so that you can buy an annuity without too much volatility on your fund value as your approach that date.

    Drawdown is an invested solution so de-risking your portfolio to that extent is unlikely to be the best strategy.
    Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.

    Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.
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