Fall in bonds effect on "Lifestyling" pension pots

player1_2

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 am interested in pensions but with no ‘specialist’ knowledge. I have some DC funds which were subject to lifestyling  and I panicked when I saw my funds fall. I made what could have been a poor decision and moved my pot to a cash fund. Doing so locked in a couple of thousand of losses (although growth has been good overall over the years) but I suspect I was lucky since I made the move just before the Truss premiership when bonds crashed big style. I now need to decide what to do with my funds ( not currently needed ) so would like to seek some growth. In this era of high interest are cash funds a safer bet for now ?

Altior

I agree, but that is due to perhaps a once in a lifetime shift. They are only more appealing if the value of your pension portfolio has not severely declined to the revaluation of bonds

It should be absolutely transparent, the expectation is that an annuity will be purchased from the pension pot and that is why it moves into a high bond weighting at later stages of life. 

As I allude to, it's no good to someone who absolutely intends to go into drawdown that they could now get more for less money in the annuity market.  

In fact, I would argue it should be optional, and people need to periodically select whether their primary intention is to purchase an annuity, or go into some version of drawdown. And have a tailored fund mix, based on the selection. 

SVaz

I’ve been talking to an ex colleague (48) who reckons his pension hasn’t made any growth since 2017.   It’s one he no longer contributes  to but I find it impossible to believe unless it’s mostly bond funds.
I’ve asked for his investments and he doesn’t know.  

I pulled up a chart of my/my Wife’s funds ,  we have five  ,  the lowest over the 5 years is VLS 80 at 28%,  the highest is Fidelity Index World at 53% ( it’s even outperformed Fundsmith at 51%)  the average is 42% or 8.47% a year.     

For the last 12 months, average growth is 5% and it’s been contantly up and down -  not sure about year to date.  

If I’d held bond funds instead that had made zero growth,  would I have got 42% more income today with an annuity of say £100k,   than in 2017?  

I’d be surprised if that was the case.  

QrizB

SVaz said:

If I’d held bond funds instead that had made zero growth,  would I have got 42% more income today with an annuity of say £100k,   than in 2017?  

I’d be surprised if that was the case. 

Prepare to be surprised.

https://www.sharingpensions.co.uk/annuity-rates-chart-latest.htm

In August 2017, £100k would have bought you a level annuity of about £5450pa.

In August 2023, it would buy £7462pa.

That's an increase of 37%. Not 42%, agreed, but closer than you might have expected?

Albermarle

SVaz said:

I’ve been talking to an ex colleague (48) who reckons his pension hasn’t made any growth since 2017.   It’s one he no longer contributes  to but I find it impossible to believe unless it’s mostly bond funds.
I’ve asked for his investments and he doesn’t know.  

I pulled up a chart of my/my Wife’s funds ,  we have five  ,  the lowest over the 5 years is VLS 80 at 28%,  the highest is Fidelity Index World at 53% ( it’s even outperformed Fundsmith at 51%)  the average is 42% or 8.47% a year.     

For the last 12 months, average growth is 5% and it’s been contantly up and down -  not sure about year to date.  

If I’d held bond funds instead that had made zero growth,  would I have got 42% more income today with an annuity of say £100k,   than in 2017?  

I’d be surprised if that was the case.  

Over the last 5 years VLS 40 is up only 9% and VLS 20 less than one per cent.

SVaz

I’m pleasantly surprised at the 37% rise in income for annuities.  I expected 25%ish.

I thought I read it wrong when I saw the chart for VLS20’s ‘growth’ . 😳

sgx2000

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.

Really?  
Are you sure?
Surely most people with smaller pension need the surity of income and choose an annuity....

Bostonerimus1

Rising annuity rates will do something to compensate for the loss in value of your bond funds if you decide to buy an annuity. But if people go into drawdown now after the crash in bond prices they will be locking in their losses and falling foul to a classic "sequence of returns" disaster that propagates throughout their retirement years depressing their income. If people do not adjust their spending they will run out of money before they die. At least the annuity guarantees you lifetime income. If my DC pot had fallen in the last couple of years and I was thinking of retiring I would probably work a bit longer to build it up again, reassess my asset allocation, look at reducing my living expenses and think about how to combine an annuity with DC drawdown.

arnoldy

As 75-90% of people (both advised and non-advised) go into drawdown then surely the default choice should be stay invested not life styling. If we had a more effective regulator than the FCA then I would expect them to be all over this and prevent companies from moving clients into life styling in preparation for an annuity they are NOT going to buy. Head shaking stuff.

Linton

arnoldy said:

As 75-90% of people (both advised and non-advised) go into drawdown then surely the default choice should be stay invested not life styling. If we had a more effective regulator than the FCA then I would expect them to be all over this and prevent companies from moving clients into life styling in preparation for an annuity they are NOT going to buy. Head shaking stuff.

Your figure of 75-99% of people not taking an annuity may well be mostly made up of people retiring when annuity rates were much lower than now. In a few years time full life-styling could be the right choice for most people. There is an unenviable choice for the FCA, defaulting either way could well be inappropriate. But I doubt most people understand enough about pensions to make a rational decision themselves.

In any case the default of life styling would mostly arise from employer DC pension schemes with limited fund choice who were previously criticised for the absence of life-styling. Pension companies are happy to sell whatever their customers want. If a regulated advisor recommended a drawdown client to adopt unnecessary major de-risking immediately prior to retirement causing serious losses they should be at risk of a compensation claim for inappropriate advice.