Annuity vs Lump Sum vs Drawdown

Krash420

Im on a workplace Pension Scheme, and the Fund that I have been investing in (only for two months as its a new job) is being split into Multiple Funds, namely:
1. Lifestyle: Targeting Annuities High-Risk Fund (mostly high risk global equities)
2. Lifestyle: Targeting Annuities Med-Risk Fund (mostly global equities)
3. Lifestyle: Targeting Drawdown Fund
4. Lifestyle: Targeting Lump Sum Fund

Now, I'm only 28, how on earth do I know which fund to opt for??? Med-Risk/High-Risk I can understand, as thats based on my Risk appetite, but surely either Drawdown or Lumpsum will depend on the prevailing Annuity rates at the time?

Any advice on what I should be aiming for this early on in my working life given the new financial freedoms?

dunstonh

Lifestyle funds are out of fashion now unless you plan to buy an annuity. At 28, dont worry about that as there will almost certainly be different options by the time you get there. Plus lifestyling wont kick in until your 50s. So, plenty of time to adjust.

Krash420

Well, I've also got the option to decide how to invest the money myself, the default Lifestyle fund (which I've got) is managed so that its mostly equities during the earlier years and moves into less volatile assets as I approach retirement age.

That, I'm fine with, it's deciding if I should manage which funds I invest in manually, or just opt for the Lifestyle Fund (which Ive just re-read details for and by default it will invest in both high/med equities during earlier years).

Should I just keep it at that for now, and when I get closer, decide if I want to change it?

That will obviously depend on how Long at the company for... my last company I was there for 6 years, and I'm in the process of transferring my Pension to my New company so I have one Pot to look after rather than two.

Playing_with_Fire_2

Also look at what the charges are for the funds, and how involved you want to be with managing this.

With my work scheme, at age 28 then you'd be mostly in equities, but you pay lower charges by investing directly in the equity fund than the lifestyling fund.

atush

At your age, i'd be in equities and i d be in global tracker. AS it should be cheaper than your managed funds.

Then going forwards, i'd be looking to learn about investing, not just for your pension but S&S isas as well

To learn, read books (such as time hale's smarter investing but there are others) and blogs like monevator (there are others).

Start with Monevator, and learn the basics such as compounded returns, asset classes, risk, diversification etc.

dunstonh

The longer the term, the more the risk is diluted. So, going heavier in equities would make sense. Especially with regular contributions.

However, there are other issues to consider. For example a 100% equity fund would have had two periods that lost over 40% of its value in the last 15 years. It is one thing to say what you should do and even perhaps say you accept that it may do that. It is another to actually see the money go down that much in real life and be just as accepting of it. If you believe you can accept that level of volatility, then that is fine. Experienced investors typically can but that is because they would have gone through crashes multiple times. New investors tend to get jitters at much smaller movements.

Krash420

Hi Everyone, Thank you for your responses.

I'm at work, and unfortunately the documentation about the funds are only available on the Intranet, so I've only now gotten access to them to be able to read them, and it seems that until 10 years before my retirement date, all three types of funds (Target Annuity/Drawdown/Lump Sum) are actually invested in the same type of assets - in this case High Risk Equities till 20 years prior, at which point, it moves down to Moderate Risk Equities.

What happens during the last 10 years depends on which of the three fund types you target. As such, you're all correct in me not needing to worry about the Pension Fund itself, but I'm definitely keen to learn more.

Thing is I am an Actuary but on the General Insurance Side, so I know and understand all the basics of investing, portfolio analysis and risk management (mostly from the exams) - I just need to build up that in-depth knowledge on what funds are out there, and how to choose between them.

I'm saving for a house, and hope to have month by the end of next year, so in the mean time all of my savings are in an ISA or Interest Paying account rather than S&S, but once I do get a house, I will be looking towards S&S ISA's.

Thanks again everyone.

N1AK

Krash420 wrote: »

Hi Everyone, Thank you for your responses.

I'm at work, and unfortunately the documentation about the funds are only available on the Intranet, so I've only now gotten access to them to be able to read them, and it seems that until 10 years before my retirement date, all three types of funds (Target Annuity/Drawdown/Lump Sum) are actually invested in the same type of assets - in this case High Risk Equities till 20 years prior, at which point, it moves down to Moderate Risk Equities.

What happens during the last 10 years depends on which of the three fund types you target. As such, you're all correct in me not needing to worry about the Pension Fund itself, but I'm definitely keen to learn more.

It really isn't worth getting too hung up on the end-game options for a pension at the moment. Even you were hoping for an early retirement at 55 (likely to be the extreme end of early retirement in ~2050) that's still as far into the future as your birth was into the past!

I can only assume that the annuity plan will be especially focused on stability of pension pot value for the last 10 years as you'll be liquidating it all in one hit.

dunstonh

Lifestyling reduces risk as you get closer to the scheme retirement age. It assumes that you are going to disinvest 100% on one set date. For annuity, that worked well. However, for drawdown, you are going to remain invested for another 20-30-40 years. So, lifestyling should not be used.

Pension legislation and options changes, on average, every 7 years. Dont worry yourself option what option in retirement now. You wont have these options. You will have something different.