Fall in bonds effect on "Lifestyling" pension pots

JSmith321

Piece in the Telegraph says "Lifestyling typically involves moving money from stocks to bonds, as they are perceived as lower risk. However, for the past two years this has failed to protect savers’ pension pots as they approach retirement, following major sell-offs in bond markets." This has proved disastrous for millions of British pension savers who have been “lifestyled” toward a bond heavy portfolio. I know a few friends whose pension pot has declined dramatically due to "Lifestyling which doesn't seem to be such a good idea now. As an aside, what impact would a falling bond market have on annuities, I know increasing interest rates seems to increase rates. Thanks

Linton

falling bond prices and increasing interest rates are the same thing. If the price of existing bonds falls their effective yield (interest as a % of price) increases. Annuity rates are directly linked to bond yields.

AlanP_2

Previous comments on here seem to indicate that it balances out when purchasing an annuity.

Pot value is lower but annuity rate higher so effectively get same annual income as before yields shot up.

Telegraph, like most media, like a nice headline and misery story irrespective of facts - makes being a journalist much easier.

SVaz

What percentage of people who are in a lifestyling pension ( I’m assuming the majority in work schemes are in a default LS scheme )  actually go on to buy an annuity on retirement?

Most people under 50 are utterly clueless and disinterested about pensions in general,
especially the lower paid. 

westv

AlanP_2 said:

Pot value is lower but annuity rate higher so effectively get same annual income as before yields shot up.

Which was pretty poor

Altior

The key take out surely is that lifestyling is obsolete, as most people will now not purchase an annuity when the time comes.

CKhalvashi

SVaz said:

What percentage of people who are in a lifestyling pension ( I’m assuming the majority in work schemes are in a default LS scheme )  actually go on to buy an annuity on retirement?

Most people under 50 are utterly clueless and disinterested about pensions in general,
especially the lower paid. 

I won't be purchasing an annuity likely.

On the flipside, I've purchased UK government bonds in the last few months with a yield of about 5% to maturity in a pension, naturally I'd hope the price will increase in the meantime but in any event an effective 5% return is about what I'd expect from most listed shares over a reasonable period without the same effective security.

The lower prices in the markets are simply a result of higher interest rates. This should be explained as a risk at the time, however lower interest rates will make bond prices increase (I benefitted from this too in 2008 although only to a tiny extent).

Troytempest

As I have posted before my lifestyled pot / annuity ratio did improve over the past year so my pension is better now than it was before this turmoil. However my pension was very much geared towards an annuity purchase which is going to be different for many people.

Albermarle

Altior said:

The key take out surely is that lifestyling is obsolete, as most people will now not purchase an annuity when the time comes.

You are assuming that all lifestyling is geared to buying an annuity. In fact most pension providers now offer a variety of lifestyling options, and some ( not sure what % ) have made the drawdown lifestyling the default option.

The issue is that people in older schemes, or who have ignored all info sent to them about lifestyling options, are still in the wrong type of scheme for them.

A secondary point is that even in the drawdown schemes, they still seem to be a bit overcautious regarding the equity %, and that includes popular schemes like the Vanguard Target retirement funds. 

Altior

My point really is that the argument that pensions are bond heavy as people approach retirement are due to the inverse relationship to the annuity market is facile, unless you actually buy an annuity. 

This is somewhat in my view, a legacy of the system pre pension freedoms. 

It should be made clearer by the providers what they are selling, ie if it's the case, this default fund assumes that you will purchase an annuity. 

From what I recall, there is no expectation with Vanguard Target retirement funds that the fund will be used to purchase an annuity. Capital preservation yes, which is slightly different. If capital preservation is key, certainly MM might be preferential to government bonds. 
 

QrizB

Altior said:

The key take out surely is that lifestyling is obsolete, as most people will now not purchase an annuity when the time comes.

Just from the threads on this forum, there seem to have been much more interest in annuities in the past 12 months compared to the previous decade.

Some of the IFAs that post here also say annuity business is up.

An RPI-linked annuity currently pays more than the supposed 4% safe withdrawal rate for drawdown.