Keep your retirement plans well on track

Published on Friday 8 August 2008 22:11

IT IS estimated that about 250,000 people set to retire in the near future could lose out, unless markets improve quickly. A market downturn can seriously erode your pension pot, unless you are in a final salary scheme or public sector scheme and, therefore, can look forward to guaranteed pension pay-outs.

But your investment strategy as you approach retirement is dictated by what you intend to do with your pension fund when the day finally dawns.

For example, if you intend to put all your pension into an annuity, it's worth protecting what you have by moving into more cautious investments. On the other hand, if you phase your annuity purchase, such as by going into income drawdown, there's little point in converting to cash.

"It depends how you will take benefits when you retire," said Jason Hemmings, director of Edinburgh IFA Albannach Financial Planning. "If you're around five years from retiring, look at those options and let them dictate your strategy."

So, depending on your circumstances, here are the main options open to you if you're nearing retirement and concerned about the impact of the downturn on your pension fund.

Switch investments

ONE thing you should not do is panic or switch into an unnecessarily low-risk cash portfolio, as this would actualise your paper losses. If you still have around five years to go, that is plenty of time for markets to change significantly.

But if you are likely to use your pension fund to buy an annuity at retirement, the consensus is that you should gradually reduce equity exposure by switching into more cautious territory, such as cash and bonds.

"If you're moving towards annuity purchase, start de-risking your fund," advised Tom McPhail, head of pensions research at Hargreaves Landsown. "If you're in emerging markets for example, come back to the UK." He recommended looking at the conservative end of UK equities – particularly UK equity income funds such as the Invesco Perpetual Income and the Psigma Income fund – and moving into corporate bond funds.

Where there are five or so years to go, you should only come out of stock market-based investments entirely if your pension pot is sufficiently big that you do not need to incur the risks posed by equities between now and retirement. In fact, it might otherwise be worth ramping up your pension contributions instead, suggested Hemmings.

"It's an ideal opportunity to boost contributions because you're buying for 25 per cent less than you would have paid in January," he said. "Make regular contributions so you can take advantage of pound cost averaging, and ensure your investments are diversified."

Pound cost averaging refers to the drip-feed approach to buying equities, which means that the average purchase price paid over a given period is going to be lower than the arithmetical average of the market price.

If your company pension is invested in a fund with a lifestyle strategy, as many are, it will automatically move your fund into increasingly cautious investments as retirement nears.

But this approach is flawed, believes Hemmings: "The switches are based on anniversary dates and the market conditions on that date dictate the value of your pension fund at retirement, so you're better off switching when it's appropriate."

Stay invested

IF YOU opt for income drawdown at retirement you'll be leaving your pension invested and drawing income from it, so there's no need to pile everything into cautious investments as retirement nears.

"If your investment portfolio is big enough, it may be worth considering drawdown post- retirement and staying invested to get some capital appreciation in the next five to ten years," said McPhail.

This doesn't mean having all of your money in equities, however. "If you're fully invested in equities at this point, you have to question why," said Donna Bradshaw, financial planning strategist at IFG Financial Services.

She stressed the importance of regularly reviewing your investments – regardless how far from retirement you are – to ensure that your portfolio is diversified and reflects your needs.

"If you switch funds, perhaps from a dog fund to one that's doing well, do so within the same sector to maintain your asset allocation and risk balance."

Delay retirement

IF YOU are you are retiring in the next few months, then the prevailing market difficulties are likely to be having a damaging impact on your pension pot. In this case, there is something to be said for putting back the date at which you cash in your pension, depending on your circumstances.

This might mean delaying retirement – if this option is open to you – or living off the tax-free 25 per cent lump sum you can take from your pension and leaving the rest where it is.

"It's not a good time to turn your fund into cash as your fund is probably lower than it was a year ago, so take your 25 per cent tax-free cash and leave the rest invested to take advantage of the market upturn," suggested Alan Steel, chairman of Alan Steel Asset Management in Linlithgow.

Similarly, taking tax-free funds from an individual savings account could buy time to delay annuity purchase and bolster your pension fund further.

But Hemmings warned that, for many people, this strategy would be unattractive and unsuitable. "It's feasible, but not something many people would like to consider because they have spent most of their lives building up to retirement."

McPhail added that banking on a market upturn is only an option if you're genuinely in the position to do it: "Your lifestyle should dictate your investment strategy, not the other way around."

WHAT NEXT?

IF IT is too late to do anything about your pension fund investments, consider how to get the best out of it once you retire. While the choices at retirement have widened, most people still take annuities, which guarantee a lifetime income.

Doing a bit of homework at this point can make a big difference. Using the open market option, you can search the whole market for the best annuity available, and with a difference of up to 30 per cent between the best and worst available, the impact on the income you have for the rest of your life can be significant.

If you are a smoker or suffer from ill health, you could also be entitled to an enhanced or impaired life annuity, which pays out more on the assumption that the payment period will be shorter.