How, what, where, when?
In the past, people may have had little or no choice about how to invest their pension savings in retirement. Today, individuals face a host of difficult decisions.
Retirement is changing. Gone are the days when it meant settling into your armchair for the next 20 years. Because people have longer life expectancies, many now choose to work on past their retirement age or spend more time pursuing interests that they had set aside during their working lives.
The way people receive their pension income is also changing. Pension freedoms have allowed people over the age of 55 to take retirement benefits in a variety of different ways. So instead of using all the money in their pension fund to buy an annuity, more individuals are choosing to leave their money invested and take income or cash directly from the fund.
But this raises the difficult question of how a pension fund should be invested during the so-called ‘decumulation phase’. As people move through retirement, so the balance of their needs between capital growth and income generation can change, which means the choice of investments can look quite different.
Mind the cash pitfall
Unfortunately, research suggests many consumers are only focused on taking their 25% tax-free entitlement and do not fully consider the options for the remaining 75% of their savings. This can mean their pension pot is not invested in a way that meets their needs and intentions. Around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. Many others only have a broad idea.1
Some people even switch their pension assets into cash, believing this to be a safe option, without realising the pitfalls or missed investment opportunities. Although there may be valid reasons to hold cash, it’s not recommended as a long-term strategy for retirees who want to grow their capital and draw an income from it as well.
"If you want to draw a regular sum of money over the course of your retirement, investing it all in cash won't give the best long term outcome," says Robert Gardner, Investment Management Director at St. James’s Place.
"Start with your objectives. How much money do you need each month, and for how long? How much of your pension would you would like to leave as a legacy?”
“Your financial adviser will then be able to design an investment strategy to deliver a sustainable retirement income using the right mix of income generating assets. This means you can target the income you need whilst protecting your capital,” explains Gardner.
Paving the way to a secure financial future
Faced with the freedom to choose how to invest their savings, many unadvised people end up making the wrong choices. That’s why the Financial Conduct Authority is now consulting on measures to make firms offer ready-made investment solutions – also known as ‘investment pathways’ – to the estimated 100,000 customers who enter drawdown without taking advice each year.2
Under the proposals, individuals will choose from the following four objectives for their retirement pot – and be offered a solution based on their choice.
- I have no plans to touch my money in the next five years.
- I plan to set up a guaranteed income (annuity) within the next five years.
- I plan to start taking a long‑term income within the next five years.
- I plan to take my money within the next 5 years.
The regulator is also proposing that savers’ pension investments are not defaulted into cash funds unless the individual actively choses this option. It is taking feedback on the consultation until 5 April.
“The pension freedoms give consumers more flexibility in how and when they can access their pension savings; but that also means they have to make more complicated choices,” says Christopher Woolard, executive director of strategy and competition at the Financial Conduct Authority.
“Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement.”
Gardner welcomes the proposals, as they give people a better chance of meeting their retirement objectives. But he notes that financial advice and the right investment strategy will further improve the outcome.
"A financial adviser will plan, design and review their client's strategy in retirement, and change the income and investment strategy to meet changing conditions," he says.
"A simple ‘one-size-fits-all’ solution will never be that sophisticated."
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
1 Financial Conduct Authority, Retirement Outcomes Review: Investment pathways and other proposed changes to our rules and guidance, January 2019.
2 www.fca.org.uk, 28 January 2019.