TONY BYRNE’S VIEW 2 OCTOBER 2017
I recently reviewed a client’s company money purchase pension scheme and discovered that it was invested in a Lifestyle Option. An investment strategy like this is designed to gradually switch the investments within the pension into lower risk investments typically over the last 5-10 years prior to the individual’s selected retirement age. This type of strategy was designed many years ago when the only option at retirement was to buy an annuity from a money purchase pension scheme.
However the pensions world has changed in recent years with the advent of Income Drawdown as an alternative to annuity purchase on retirement meaning that not everyone will buy an annuity at their selected retirement age anymore. George Osbourne’s introduction of Pensions Feedoms in April 2015 has further tilted the balance against annuities which are now considered by the majority of retirees as inferior to Income Drawdown. This is further evidenced by the fact that annuity purchase is no longer the favourite retirement option. Prior to Pensions Freedoms annuity purchase was overwhelmingly the preferred retirement option but currently the most favoured option is Income Drawdown. Annuity sales have dropped to 25% of all Retirement options whereas prior to Pensions Freedoms they represented 75%.
What has exacerbated the fall in annuity sales is that the annuity rates on offer are at close to historically record low levels meaning that the pension incomes on offer from annuities are much lower than they used to be. Allied to this disadvantage is the fact that an annuity purchase is a one-off irreversible financial planning decision which individuals are wary about in the light of the Equitable Life “insolvency” some years ago which led to negative consequences for their annuitants.
So the concept of a lifestyle option for a pension for the last 5-10 years before retirement makes little sense for the vast majority of individuals who are likely to remain invested for decades to come in Income Drawdown. Such people do not need to invest increasing amounts into lower risk investments because most people will not buy an annuity on retirement.
The particular client whose pension I reviewed was surprised that the return on his pension was negative for the last 12 months when stock markets have risen over the same period. On further investigation I discovered that he was 100% invested in bonds because he was still invested in a Lifestyle Option. He has now decided to invest more money into equities in order to grow his pension fund. He will therefore cancel the Lifestyle Option Strategy as a result.
So if you have a Lifestyle Option on your pension do question whether or not it is right for you. The best option is to discuss your pensions position with a pensions specialist adviser. In the meantime you might like to request a copy of our Retirement Options guide for free from our website.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.