Holding cash vs IL in pension ahead of commencement

gm0

I am considering the fairly limited options for holding short term money (say for a min of 1 to a max 3 years) inside a pension wrapper ahead of implementing drawdown.

Clearly the primary investment objective is to have TFLS ready to go regardless of a short term equities dip in the period of interest. A transfer from long term investment to short term reduced volatility and risk assets. A secondary objective is not to lose too much value against inflation - of more interest at the 2-3 year end than 12 months.

There are two options on offer:

Cash Sterling Liquidity 0.09 TER. which is returning between 0.49 - 0.65 and while losing ground on inflation for the short time considered meets an investment objective of securing the TFLS funds against equity revaluation in the immediate period prior to action. All short duration stuff <1 year
Default option.

The only other "near to cash" alternative on offer is a LGIM Pre-retirement inflation linked fund 0.07 TER.

-1% last year so -ve and worse - but the historic returns bounce around (a lot) over the past five years.
This one is an Index Linked bond fund stuffed with longish 2040/2050 government IL and some regular corporate bonds in it for some reason based on the fund sheet.
Clearly a spike in interest rates in the period (1-3 years) would be bad for this bond fund.

What are the scenarios/reasons why I might consider rather than simply reject the second IL option ?.

If I have understood the intended use of this fund correctly it could be used (mixed with cash) to store harvested returns from equity performance as part of rebalancing prior to drawing them or as a longer term IL store of value during the much longer term equity profiling down - prior to annuity purchase (Not my scenario)

Am I missing something ?

bowlhead99

FUND AIM:
The fund aims to provide diversified exposure to sterling assets that reflect the broad characteristics of investments underlying the pricing of a typical inflation-linked annuity product.

So, if you are coming up to buy an inflation-linked annuity product in a couple of years time, it might be worth considering. This is because if interest rates rocketed, the fund would lose value but you would find inflation linked annuity products cheaper to buy. However if interest rates fell sharply, or if market inflation expectations changed significantly, the fund could rise in value, which would be convenient because the annuity products would have similarly risen in cost and you would need a bigger fund to buy the same inflation-linked annuity.

As you're not targeting a purchase of an inflation-linked annuity, it's not really a suitable product. You are simply trying to preserve the value of your TFLS ahead of withdrawing it from your pension. As you suggested, a spike in interest rates would cause a loss of value, and the fact that annuities got cheaper would not be much comfort. Although it depends on what you were going to spend your TFLS on - if you were going to reinvest it outside the pension, maybe you would relish an increase in interest rates and the hit which financial markets would take, and not mind that you had lost some value on your fund pre taking the TFLS.

gm0

Thanks I clearly hadn't understood why that fund was offered in that form in the first place. Not just as access to IL bonds alongside the corporate bond funds.

But specifically configured to risk manage the annuity purchase scenario. Presumably if I wanted to purchase some GI in the form of an annuity later in retirement then such a fund could then be a parking place to siphon multi-asset/equity returns as preparation in the few years prior to that - again only on the basis of locking in a fixed date for doing that transaction. With more flexibility presumably you would not bother with it.

londoninvestor

gm0 wrote: »

But specifically configured to risk manage the annuity purchase scenario. Presumably if I wanted to purchase some GI in the form of an annuity later in retirement then such a fund could then be a parking place to siphon multi-asset/equity returns as preparation in the few years prior to that - again only on the basis of locking in a fixed date for doing that transaction. With more flexibility presumably you would not bother with it.

Correct. A similar (but not IL) fund is available in my (ex)-employer's pension scheme too, and in our case the scheme literature explicitly covers this:

Pension_scheme_fund_guide wrote:

LGIM’s Pre-Retirement fund invests in assets that broadly reflect the investments underlying a typical non-inflation linked pension annuity product with the aim of offering protection against changes in annuity prices. This is achieved through investment in a number of LGIM’s corporate bond and gilt funds.As the fund invests entirely in bonds, it should be subject to less volatility than either balanced or equity funds. However, as the fund invests solely in debt securities, it is unlikely to produce returns as high as balanced or equity funds over the long term. As the cost of purchasing a pension is closely linked to long-term bonds, investing your pension assets in a bond fund carries less risk than investing in equities. This fund aims to track its benchmark so the risk of underperformance against the benchmark is small relative to an active fund.