Should I change my gilt investments

Oranda

Approaching State Retirement Age and have only recently started looking at the individual funds into which my DC pension is invested.

I should have been more proactive over the last five years, but was ignorant in thinking that the recommend Lifestyle approach from my pension provider would have looked after my pension.

However, due to this Lifestyle approach I have some of my funds invested in guilt index tracker which hasn't performed well for a number of years. I have very limited knowledge  about guilts, so I'm inclined to switch it to another fund as cant see I can it can do worse. Any reason why I should not switch it to another fund?

Notfarfromtheborder

That would depend on what you wanted to do with your pension. When and how do you want to take benefits?

You mention 'some of my funds', that would suggest you have others.

I've 5 funds in my pension, each designed to do something different to achieve an overall balance. One of them is the best performer, one of them is the worst performer.

DRS1

You may need to give more detail before anyone can comment on this.

For example what sort of Lifestyle approach have you been taking so far?  Is it one assuming you will be buying an annuity at eg age 65?  Or is it one assuming drawdown?

When did you start switching into this gilt index fund?  It will have been gradual and it will make a difference whether you have been switching into it in the last 5 years or whether you did so 12 years ago.  Gilts had a bad time in the recent past.

What sort of gilts are in this fund?  Conventional gilts or index linked gilts short term gilts or longer term?

What other fund are you thinking of buying instead of this gilt fund?  Some sort of fixed income fund or a global equity index?

What are your plans for the pension?  Will you buy an annuity?  Or do drawdown?  Or leave it for your kids to inherit?

One thing to consider is that if you plan to buy an index linked annuity then you might positively WANT to be invested in index linked gilts (at least for whatever you plan to spend on the annuity).  Of course there is some finesse about the duration of those index linked gilts which would be beyond me but maybe up to 20 years would suit?.

Oranda

Notfarfromtheborder said:

That would depend on what you wanted to do with your pension. When and how do you want to take benefits?

You mention 'some of my funds', that would suggest you have others.

I've 5 funds in my pension, each designed to do something different to achieve an overall balance. One of them is the best performer, one of them is the worst performer.

Almost certainly drawdown in respect of taking my pension.

Have around 25K (uncrystalised) invested in a 15 year guilt tracker which is the worst performer, -ve for 4 out of last 5 years. But I really don't understand guilts. Only that they used to be a safe bet towards reaching retirement, but then took a dive in 2022 and haven't really recovered. And I dont know what is likely to make them recover and over what timescale. Will probably crystallise it in 4 - 6 months, so 75% will move to my drawdown funds which is invested in different funds. Granted a bit late probably to change funds, even moving to cash would seem better for 6 months?

dunstonh

I should have been more proactive over the last five years, but was ignorant in thinking that the recommend Lifestyle approach from my pension provider would have looked after my pension.

It does look after your pension if your intention is to buy an annuity.

However, due to this Lifestyle approach I have some of my funds invested in guilt index tracker which hasn't performed well for a number of years. I have very limited knowledge  about guilts, so I'm inclined to switch it to another fund as cant see I can it can do worse. 

Bonds went through their worst period in over 100 years.    However, recently they have improved.  

Almost certainly drawdown in respect of taking my pension.

So, using a lifestyle strategy to buy an annuity is not really the right solution for you.

Only that they used to be a safe bet towards reaching retirement, but then took a dive in 2022 and haven't really recovered.

They are a safe bet if you are buying an annuity.  Annuity rates have rocketed.   Think of it as similar to pushing down on a see saw.   One side goes down, the other goes up and vice versa.

Granted a bit late probably to change funds, even moving to cash would seem better for 6 months?

Cash has been the worst-performing asset class/investment area for the last 6 months (worse that gilts).   Gilts have been the best of the defensive assets in the last 3 months.   Although we have Budget next month.....

Oranda

Thanks all far for your comments and observations.

Yes, annuity was probably the thing when I started this DC pension, so I can understand the lifestyle strategy it adopted. And I probably should have paid more attention to the funds that my pot was invested in. Although, in my ignorance I still don’t understand why the life styling would automatically move and leave part of my investment in funds (15 yr guilt tracker) which my pension provider have subsequently reclassified as high risk, and have seriously underperformed for last 5 years.

Even if I were to buy an annuity on retirement, surely the value of my pension pot would dictate the value of the annuity I can buy? Bigger pot = Bigger annuity? Or am I missing something add the guilt tracker funds classed differently in terms of value when purchasing an annuity? Retirement date is currently set for Feb 26, and was Feb 25 when starting the policy.

Alexland

Gilts are traditionally safe assets offering a pre-defined return backed by HM Treasury if held to redemption.

In the era of zero-interest rates people were trading them mid-run for much higher prices which had the effect of pulling the return forward and leaving very little remaining return for those holding to redemption. So when rates started to rise then that valuation premium unwound painfully.

So the problem wasn't with the gilts it was that people were paying too much for them compared to long term norms. Anything gets risky if you pay too much. It wasn't the gilts' fault people did that. They became a 'return free risk' and some of us here were warning against holding them at the time.

Now prices have crashed the yield is much more attractive and some of us have started buying them particularly the inflation linked gilts that can offer a couple of percent above inflation long term (they were previously offering below-inflation return). They are a great way to diversify against the risk that the stock market has now become overvalued compared to historic norms.

Annuities are priced based on bond yields so if your bond price has gone down the yield will have gone up and so annuities will now buy more income than before. So you might have less in your pension pot but it should roughly balance out as it will buy more income.

5 years isn't long enough to judge performance as economic cycles can run much longer and you risk falling into the trap of buying high and selling low. If you learn to understand the assets like they are your children you get a sense of what is going on with them which is helpful in avoiding or at least reducing exposure to things that are overvalued and seeing the opportunity in things that everyone else now hates.

Markets have taught investors to avoid gilts/bonds and keep ramping up the prices on the stock market which was a great strategy that some of us were doing when equities were the only thing worth holding but now seems to be completely the wrong lesson.

Aretnap

Oranda said:

Even if I were to buy an annuity on retirement, surely the value of my pension pot would dictate the value of the annuity I can buy? Bigger pot = Bigger annuity? Or am I missing something add the guilt tracker funds classed differently in terms of value when purchasing an annuity? 

They're not classed differently as such, but you are missing the fact that annuity rates rise and fall with gilt prices, in the opposite way to your fund value.

For example, 5 years ago as a 65 year old, £100,000 would have bought you an annuity paying about £4900 per year. Now £100,000 would buy a 65 year old around £7800 per year. 

There are a number of factors that determine annuity rates, but by far the biggest is gilt prices. Annuity providers invest in gilts to provide a guaranteed steady income, and if gilt prices are low it means that your £100,000 can buy more guaranteed steady income.

So the theory is that if gilt prices fall, as they have done over the last 5 years, then yes the headline value of your pension pot does fall - but the amount of annuity that you can buy with that pot should stay the same (roughly, more or less, as a ballpark figure etc etc). And if you're planning to buy an annuity then what ultimately matters is how much annuity your pot will buy - not what the headline number at the top of the screen is.

The big risk that it protects you against is the risk that bond prices will jump, and therefore annuity rates will fall, just before you retire. If you'd been invested mainly in equities (or worse cash) round about the time interest rates went to nearly zero after the financial crisis and bond prices went through the roof you could have been watching the value of your pot go up, but the expected value of your annuity still dropping like a stone.

Of course this logic doesn't work so well if you're not planning to buy an annuity. But a lot of pension plans are still set up on the assumption that buying an annuity is the default option for most members. And after a decade or so of very low annuity rates, annuities look like good value again, so maybe having them as the default option is not such a terrible idea, even now.

Alexland

Aretnap said:

Of course this logic doesn't work so well if you're not planning to buy an annuity. But a lot of pension plans are still set up on the assumption that buying an annuity is the default option for most members. And after a decade or so of very low annuity rates, annuities look like good value again, so maybe having them as the default option is not such a terrible idea, even now.

Yup but even if not planning to buy an annuity the low price and higher yield of IL gilts are attractive in underpinning a drawdown strategy with a basic level of income especially for the more advanced investor that builds a gilt ladder to align the redemptions across their retirement period so they are not taking any risk on the resale value of the gilts.

artyboy

I think the OPs spell checker might be the guilty one here...

Albermarle

I should have been more proactive over the last five years, but was ignorant in thinking that the recommend Lifestyle approach from my pension provider would have looked after my pension.

It does look after your pension if your intention is to buy an annuity.

In the past they were often designed for people buying annuities. However nowadays with most pension providers the default lifestyle fund is for drawdown, and in some cases people with annuity based ones have been encouraged to change ( or at least think about it).
Of course there could well be many people with older pensions still in the wrong lifestyling option.

OP - Can you clarify exactly what lifestyling option you have ?