Pension Planning for the New Year

Pension Planning for the New Year

Howard Goodship, Ringwood IFA - Investment choices within a Pension 

Tuesday 19 December, 2023

For many people, pension savings may be their most significant asset other than their house. Yet we often find people don’t know what they are invested in, let alone understand the investment choices available to them.

Making the right choices can have a significant effect on the size of your future retirement fund. 

When joining a pension scheme, you are often placed into the scheme’s default investment funds. These are usually Lifestyled to the scheme’s Normal Retirement Date (NRD), for example age 67 (but could be between 60 and 67). Your money is then invested in growth assets (usually shares) in the early years with the aim of offering a higher return, albeit with more volatility. The logic is that volatility is less important at this stage as there are many years to go before the money is required so if the fund suffers a fall in value there is time for it to recover. 

As the NRD draws closer (for example 10 years away), Lifestyling will automatically start to switch a percentage of the money into lower risk assets (perhaps a balanced fund investing in a mix of shares and bonds or a low risk fund investing in bonds or cash). The logic being that as you get closer to retirement your pension becomes less volatile as you have less time to recover from stock market declines. 

For many this is a sensible approach and aims to help manage risk without any effort required by the pension plan member. But there are pitfalls: 

1-Lifestyling can vary between schemes so understanding how your own pension scheme operates is important. 

2-There can be different Lifestyled target outcomes. For example, some will target the purchase of an annuity at the Normal Retirement Date so the asset allocation will be more defensive and result in 75% invested in bonds and 25% in cash at the NRD. Other’s may target drawdown so will be more balanced and perhaps end up with 75% in a medium risk balanced fund and 25% in cash. 

3-What if you plan on retiring before the pension scheme’s NRD? The investments will likely be unbalanced and not reflective of your plans which may lead to unnecessary risk. 

There are alternative choices. 

Most schemes will offer a range of funds from which you can “self-select”. By doing so you may be able to better bespoke your pension plan to your own retirement plans. However, selecting the right funds, and the subsequent returns earned from those funds, will affect the final value of your retirement pot so this is not recommended unless you are a very experienced investor or you take professional financial advice. 

There are even pension plans available which can offer temporary annuities and therefore remove investment risk. The annuity can be taken as income or rolled up within the pension and therefore offers a guaranteed future value. The rates on these plans have increased over the past 15 months as interest rates (and therefore annuity rates) have risen. These can be very attractive for clients under 10 years from retirement or for more cautious investors. 

In conclusion, if your pension is a significant part of your overall wealth and therefore critical to your future retirement plans, treat it as such and give it the attention it deserves. Pension planning can be complex, so seeking advice from suitably qualified professional advisers is recommended. Visit our pension planning page for more information.

In Summary...

If you want pension advice from an independent financial adviser contact your local Lonsdale Wealth Management financial adviser in St Albans, Barnet, Harpenden, Ware, Ringwood, Chippenham, Stafford, Wimbledon and Leeds / Bradford.

“A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.”

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