Lifestyle options pension

Mensch

When I started with my current employer eight years ago I decided to go with a Prudential Stakeholder pension and I have been very fortunate with that decision until recently.
However, since 16 April this year my investment has gone down by over 6% despite an additional 1200 quid being contributed during the same period. I don't rate the Pru helpline (sorry, Craigforth!) so this is very much my own analysis but I think this disastrous turn of events so close to retirement must be a result of Lifestyling Options where I have just noticed that the long-term investment/pre-retirement ratio has gone from 55/45 to 43.5/56.5 in the last couple of months. I realise that the FTSE has also gone down by more than a few points and that will also have played a role in the reduction but then again a SIPP I took out a year ago is still showing an increase of 7%.
I'll be retiring in September so my question is: will it do any good to change the ratio back to 55/45 for the next four months (though I could drag that period out to, say, 12 months if necessary)? Either period obviously wouldn't be long enough to redeem the situation entirely but is there any chance it might improve my position? Or would I better off just doing nothing and accepting this kind of thing happens in the final years of a Lifestyling Options pension plan?

dunstonh

However, since 16 April this year my investment has gone down by over 6% despite an additional 1200 quid being contributed during the same period.

Not unexpected given short term volatility.

but I think this disastrous turn of events so close to retirement must be a result of Lifestyling Options where I have just noticed that the long-term investment/pre-retirement ratio has gone from 55/45 to 43.5/56.5 in the last couple of months.

That small adjustment is not the reason. Market conditions will be the reason.

but then again a SIPP I took out a year ago is still showing an increase of 7%.

Same investments? Same dates?

I'll be retiring in September so my question is: will it do any good to change the ratio back to 55/45 for the next four months (though I could drag that period out to, say, 12 months if necessary)?

If you intend to buy an annuity then you should be in cash and some time ago. Increasing your risk is not a sensible idea in that case.

If you intend to go into drawdown then you should not be using a lifestyle fund as you will be invested for another 20-30 years.

Either period obviously wouldn't be long enough to redeem the situation entirely but is there any chance it might improve my position?

It may improve the situation but it may make it worse. Without a crystal ball there is no way to know what future returns will be with the different asset classes.

jamesd

The key decision point for you is whether you will be spending all of the money quickly at retirement, by buying an annuity or by drawing it at a very high rate while deferring the state pension, which typically pays out around three times as much ongoing as an annuity for the same purchase cost, for those reaching state pension age before 6 April 2016.

RPI inflation-linked annuities are paying around 2.5% of the amount spent in ongoing income. State pension deferral pays 10.4% per year of deferral. This huge difference normally makes buying annuities a crazy choice around state pension age unless the pension pot is so large that it's not practical to defer for long enough. In that situation as well as planning to defer, buying Class 3A NI can be useful, though it's a far less good deal than deferring, until age 82 or so when class 3A pay more per Pound spent.

If you do plan to do those things you should probably switch to 100% cash now. We're in for a time of ups and downs in both shares and bonds, so best to just be out of the market in the short term and get your secure lifetime income without worrying about them.

If you instead plan to be invested long term than I suggest that you do consider the great value that state pension deferring offers for at least some of your money. It pays well above long term stock market growth (about 5%+ inflation vs 10.4%+inflation) so taking the higher income and investing it can end up beating just not buying the higher income unless your life is uncommonly short. In this case you should try to ensure that you have at least a year's worth of spending in a savings account so you don't need to draw on invested money during a market downturn.

Whatever you do, don't just be a mug and buy an annuity from the Pru because they will make it easy to do. In almost all cases it's possible to do significantly better than buying an annuity from the place where the pension money is. But of course, deferring the state pension beats that hands down in most cases anyway, so it's mostly irrelevant.

Beyond these points we'd really need to know a lot more about your income, assets and desires to make adequate suggestions. Also those of any spouse you may have.

kidmugsy

jamesd wrote: »

In that situation as well as planning to defer, buying Class 3A NI can be useful, though it's a far less good deal than deferring until age 82 or so.

Allow me to suggest, jamesd, that that sentence is rather ambiguous. You didn't mean, I'm sure, to imply that a bloke in (presumably) his sixties might consider deferring until he's 82.

Mensch

Beyond these points we'd really need to know a lot more about your income, assets and desires to make adequate suggestions. Also those of any spouse you may have.

Thanks for all the responses.Compared to many, I'm fairly well off so I can defer the state pension for a year or two and I won't be using an annuity or drawdown for the moment though I am thinking of accessing the TFLS. That's why I'd like to see my pot going back up over next three to twelve months. Is that realistic if I switch back to long-term investments?

My spouse is retiring in December. At the moment she has rental income and investments (mostly ISAs) and a couple of pensions (from then). Oh, and she won 30000 quid on the postcode lottery a couple of months ago. We have no debts, own a house worth over a quarter of a million (in an area where that's unusual), two cars and she wants to spend a large portion of her money (and mine) on holidays in the sun and cruises after she retires. Other than that, we will be living cheaply because we're both rather frugal - some might actually say 'parsimonious'!

That said, I don't expect a very, very long retirement. I'm quite healthy at the moment (apart from HBP, controlled by drugs) but a fifty-year addiction to red biddy must take its toll sometime.

dunstonh

and I won't be using an annuity or drawdown for the moment though I am thinking of accessing the TFLS.

So, why are you in a lifestyle fund? It would help us know why you have chosen an investment which focuses on annuity purchase on a given date.

That's why I'd like to see my pot going back up over next three to twelve months.

What if it goes down?

Is that realistic if I switch back to long-term investments?

Long term means 10-15 years. Medium term is 5-10. Short term is less than 5. So, when you are talking 12 months, it is best not to use an asset mix that is designed for the long term.

Equities can drop by 40% in 12 months. Typical recovery times are 1-3 years. There may not be a drop. There may not be a gain. Nobody knows when these things happen. This is why you invest for the long term as you have to average out the ups, downs and nothing years.

kidmugsy

For January sunshine I recommend Madeira. Or if you fancy being away for a month, Nelson NZ.

Mensch

So, why are you in a lifestyle fund? It would help us know why you have chosen an investment which focuses on annuity purchase on a given date.

I thought it was the best one available when I took it out but I see now that I should have been more careful with that choice. This actually happened once before as well (a couple of years ago) and I got them to switch the investment back to Pru long-term investments (their term) then and asked them at that time not to change anything in future unless I asked them to but they seem to have ignored that request this time around.

While I do regret the missing 6%, I am a pretty laid-back individual and, in times of stress, I just have to recall that my personal contribution to this pension is just over 25% of the total. Can't really complain about too much after all.

FatherAbraham

dunstonh wrote: »

If you intend to buy an annuity then you should be in cash and some time ago.

Cash? If one intends to buy an annuity, then one should have gradually moved to long-dated gilts.

Warmest regards,
FA

jamesd

kidmugsy wrote: »

Allow me to suggest, jamesd, that that sentence is rather ambiguous. You didn't mean, I'm sure, to imply that a bloke in (presumably) his sixties might consider deferring until he's 82.

Not what I intended but it might be worth doing if it still produced a higher income than spending the money on an annuity. That would depend on what was done with the money besides providing the "income" replacement for the sixties annuity income level and state pension.

jamesd

Mensch wrote: »

That's why I'd like to see my pot going back up over next three to twelve months. Is that realistic if I switch back to long-term investments?

It's not realistic over that timespan. Too much chance involved over such a short period.

Since you plan to take a tax free lump sum I suggest that you just do it now rather than waiting. Or take a 25% tax free lump sum from part of the pot now and the rest later, effectively hedging the risk/benefit potential for the part you plan to take in the near future. If your existing provider doesn't offer this there are plenty that do.