Stuck in the waiting room until life’s host deigns to invite us in, I’ve decided to write 2020 off. Entries on the family calendar serve only to mock in a daily chorus from the classic TV show Bullseye: “Come and see what you would’ve won!”
Let’s pretend this year never happened
On the plus side of a resigned outlook such as this, any plans that do come about will be a bonus. For investors – and that includes all of us with a workplace or personal pension – a similar stoicism is helpful, particularly if you have a minimum of five years before the money is needed. As far as our long-term financials are concerned, let’s just pretend this year didn’t happen. And should the value of our pensions or other investment savings recover some of the lost ground – well, that will be just grand, thank you.
Is there anything we can do?
For some, working an extra year before retirement might be an option. And for those still earning but not spending much in lockdown, adding to the retirement pot could be attractive. (By the way, advisers up and down the land are being asked if now is a good time to invest in shares. One thing is for sure: if it was and remains part of your 2020 plan to make long-term investments this year, now is a good time compared with January.)
But leaving aside the sport of minute-by-minute valuation watching or shall-I-shan’t-I investment top-ups, there is something you could be doing with regard to your pension. In my recent blog post ‘Today’s challenge: Get down and dirty with your pension‘ I challenged readers to dig a little into their workplace or personal pensions to find out how their retirement savings are being invested. In particular, I want to address anyone who is in what is known as a ‘Lifestyling’ strategy.
Did you make a Lifestyle choice?
It should be fairly easy to see if this is you, either from your annual statement or online account: your pension investment choice will most likely have the word Lifestyle in one form or another in its name. It’s a strategy where your investments are automatically changed from one type to another in the years running up to your retirement. Specifically, it tends to mean that your money is moved out of shares – which are at risk of wide ups and downs in their values – and into fixed income bonds/ government gilts and cash deposits, which do less of the up and down thing.
A bit of history
There’s a bit of history to the reason for this. Before 2015 and the so-called pension freedoms (there’s more on this in ‘When even Health and Safety thinks you’re being too cautious‘), the investments in your pension pot would have been sold on retirement so that a guaranteed income could be bought (called an annuity). Selling off the shares well ahead of this point was sensible in case something unexpected (I don’t know, like a global pandemic maybe) happened all of a sudden and your pension was worth a whole lot less than it had been a few months previously. Holding fixed income bonds or cash was a safer bet.
Sacrificing the potential for a big up
So, what’s not to like? Well, safe bets tend not to be very exciting. In other words, when you sacrifice the wide ups and downs of share prices for something that doesn’t vary so much in value, you sacrifice the potential for a big up. Worth doing if you are definitely going to buy that annuity (especially so if you had planned to buy one around about now). Not so, if you want to remain invested for longer and maybe keep your pension for as and when you need it.
Selling your growth engines at a knock-down price
The other thing is that these switches happen automatically. Depending on your pension provider they can start as early as 15 years before your chosen retirement date – and will therefore be gradual. Others might start closer to retirement – maybe at 10 years and happen a bit faster. Let’s say you are in your 50s now and the automatic sale of shares in favour of bonds or cash in your pension has started happening this year. Because the price of shares has fallen dramatically in the last few weeks, you could be in the position of selling your growth engines at a knock-down price so as to buy your safe bets that are not going to grow very much going forwards.
This is like selling a property in an increasingly popular area with great schools and amenities just after a massive collapse in the housing market and buying a student rental house with the reduced proceeds in an area that will never command a premium. Fine if you know that the rental will be enough for you to live on forever, but you’ve lost any growth you had before the collapse and there’s no prospect of future growth to generate more income should you need it.
Check where you are with your Lifestyling…
So what can you do? First, you need to check whether this Lifestyling has kicked in yet:
- What is your chosen retirement date? (If you have online access to your pension account, you should be able to find this out quite easily)
- When does the Lifestyling switch from equities (shares) to bonds/cash deposits start (ie how many years before retirement)? You might need to dig a little to find this out from the key features of the Lifestyle strategy of your particular plan
…and ask yourself some questions
If it has started – or is imminent – you need to ask yourself some questions:
- Think about whether the retirement age specified is right for you. It’s important to note that this is the age at which you are assumed to start taking your pension, not necessarily the age at which you will stop working. You can take money from a pension from the age of 55 – you don’t have to have stopped work. Equally, you can stop work but defer taking money from a pension until it suits you.
- If you decide to alter your chosen retirement date (again, you should be able to do this online), this won’t affect when you can start taking your pension benefits if you change your mind again (as long as you are over 55). However, it will affect when the process of ‘de-risking’ your investments starts in accordance with the Lifestyling strategy.
- Look to see what other strategies are available for your pension. Is there the option to change to investments that better reflect the risk you are willing to take for the growth you want from this pot of money? Does the online service offer you a risk questionnaire? Look at the other options and where they are invested – do you understand the types of assets you are invested in and how risky they are?
Changing my lifestyle
I have a workplace pension that has been running for a little over two years. After writing ‘Get down and dirty with your pension’ I did my own challenge on this pension – and, for your eyes only, I have recorded the results of this in the ‘A bit more understanding’ section at the end. Spoiler alert: I have decided to change my Lifestyle!
But just before you go, let me venture another option for anyone who feels that engaging with the investment choices in their pension is a bit above and beyond what is humanly possible in the midst of a national crisis:
Talk to a financial planner or adviser (they’re the same). This is exactly the sort of thing they are good at!
21 April 2020
All opinions expressed are those of Carole Haswell and do not constitute financial advice
A bit more understanding
My personal pension challenge
- My current workplace pension has been in place for over two years but I realised that I hadn’t in fact registered for the online service, so that was the first step!
- I’m in something called a Group Personal Pension, which operates like a personal pension plan but is provided by my employer
- I had to rummage around a bit to find a current valuation and, when I did, I noticed that the value was almost exactly equal to the contributions I have paid. I’m fine with this – after recent falls in the stock market there are no losses and I am in this for the long term
- Furthermore, I am continuing to contribute and, during this period of uncertainty, will be picking up investments in shares at a lower price than previously
- My retirement age is set at 65 – changing that looked relatively simple (an edit in my details)
- I am in the default pension strategy, which the provider calls ‘Balanced Lifestyle Strategy’ and which they say is suitable for someone with an in-the-middle attitude to risk. Its aim is to deliver above-inflation growth and to protect my retirement income by managing the risk in my investments in the run-up to retirement
- Within this strategy I am invested in their ‘managed portfolios’ – I was able to find out which ones by looking at the Fact Sheet for the Balanced Lifestyle Strategy. This gave me details of four of their managed portfolios between which they would automatically switch my pension fund at these points in my life:
- o 15 years or more from retirement
- o 10 years from retirement
- o 5 years from retirement
- o At retirement
- As I am between 10 and 15 years from my retirement age, I compared the investments within the top two of those portfolios and noted that the one I was being moved into would put a lower percentage of my investments in global equities (the ‘riskier’ type of asset) – going down from 72.5% to 60%. The effect of this is to take some risk away from my pension fund, but it also limits the potential growth I could get
- The Fact Sheet for the strategy told me “The Lifestyle Strategy is not compulsory. You can start or stop it any time.”
- Going back to the main part of the online service I found an option to ‘Change investments’. This is where I could move away from the default strategy into: a different lifestyle strategy (eg one with a higher or lower element of risk); one of their managed portfolios that I would stay invested in rather than being moved as I get closer to retirement; or investments that I could pick myself from their range of funds.
I don’t feel that a lifestyle strategy is right for this pot of money for me. I intend to contribute to it for another 10 to 12 years – which does take me to the chosen retirement age – but there’s a chance I might want to go beyond that. In addition, it is not my only provision for retirement and is relatively modest. I may not need to touch this pot until some time after my retirement age and so can afford to take a bit more risk with it for longer – in other words I won’t be forced to sell the shares to buy an income from this one at a set date. I therefore decided I should move away from the Lifestyle strategy, favouring one of the pension provider’s managed portfolios that has around 80% in equities (shares) and there will be no automatic switching out of these in the years running up to the retirement date. This gives me more potential for growth but does not protect me from sudden and unexpected falls in the stock market (whoever thinks that’s going to happen, anyway?). I can move back into the Lifestyle later if I want – but at least I know that, for now, my growth engines won’t be cut loose at a time when prices have taken a significant fall.