12 September 2015

Three Investment Strategies

Following the pension reforms there are now three main options for members taking their pension pot: cash, drawdown or buying an annuity.

With these options it becomes important to plan well in advance as it will be up to members to make decisions. Decisions which could be one of the biggest most will ever have to make.

For those with smaller pots, say £10,000 or less, it's likely to be a matter of simply taking the money in a single lump sum subject to avoiding higher tax rates. But for those wishing to secure an income over the long term, it's another matter altogether. The question for them could be, "Do I want the security of a fixed income even though annuity rates are low?"

Or, "Do I want to take my chances on investment returns and draw an income from my savings in the hope that growth will at least cover my withdrawals, while accepting I may run out of money before I die?"

Once the choice is made, it becomes important to choose an investment strategy that places the member in the best position to achieve their desired outcome.

Our solutions

Because of this we've created a new investment strategy for each option in order to smooth the way to taking pension benefits.

Our research suggests many people won't decide how and when to take their pension money until nearer their selected retirement age.

Their decision will be made on a number of factors such as their employment situation, outstanding mortgage and debts, savings and investments, other pensions, number of dependants, health, how long they think they'll live and so on.

Reviewing our position on investing close to retirement, we considered a three year strategy to be appropriate for the vast majority of people. Therefore the following strategies for members allow them to plan how to take their benefits, and to choose a strategy that's right for them to be activated three years before their intended retirement age. These strategies are:

  • Cash Lifestyle Profile
    For members wishing to take their entire pot as cash in one go or over a relatively short period, the Cash Lifestyle Profile gradually moves money into the Cash Fund, so there's less chance of a sudden fall in value in the event of a crash in investment values.The fund invests in short term money markets such as bank accounts and treasury bills. It doesn't invest in any assets that can fall in capital value such as fixed interest securities. The unit price would only fall if a deposit holder or the government were unable to meet their obligations or the interest earned was insufficient to cover the management charge and other expenses.
  • Drawdown Lifestyle Profile
    For members who wish to leave their pension pot invested to provide an income over the medium to long term, either as monthly payments, occasional lump sums or a combination of the two, the Drawdown Lifestyle Profile gradually moves their money into the Retirement Income Multi-Asset Fund.The objective of this fund is to provide long-term steady income during retirement to complement and facilitate the drawdown of regular income. It invests in both index-tracking and actively managed funds - which aren't guaranteed and may fall as well as rise.
  • Annuity Lifestyle Profile
    For members wishing to secure a guaranteed income for life or a fixed period, the Annuity Lifestyle Profile moves 75% of their money into the Pre-Retirement Fund. The fund invests in sterling assets that reflect the broad characteristics of the investments underlying the pricing of a typical fixed rate annuity.The remaining 25% of the money moves into the Cash Fund.

These strategies are options only, and some members may choose to invest differently near to retirement.

Communicating to members

To encourage members to engage with their retirement planning, we're using variable messaging on annual benefit statements, depending on how close they are to their selected retirement age, to prompt them to review their investment strategy from time to time.

In addition, we're writing directly to members once they're within four years of their selected retirement age to suggest they consider one of the new Lifestyle Profiles to help them achieve their desired outcome.

Helping members make the right decisions

In addition to scheme websites and other online resources, our brochure,  PDF file: Pension Freedoms and Choice PDF size: 586KB  provides a high level explanation of the options available:

  • What the member needs to think about before taking their money.
  • Where to go for independent advice and guidance.
  • The options: cash, Flexi-Access Drawdown and annuities with simple case studies.
  • Information on tax, state benefits, pension scams and other important considerations.
  • What to do next.