A lifestyle problem for retirement savers
Savers could be missing out on investment growth that would boost their retirement income, says David Prosser.
Nine millions savers may be keeping their pensions in the wrong type of investments because providers are taking too long to adjust to the 2015 pensions freedom reforms, according to the Financial Conduct Authority (FCA), the UK financial-services regulator. Earlier this year the FCA urged providers of "lifestyle funds" to reassess how these funds are run, due to concerns thats avers are missing out on investment growth that would boost their retirement income.
Lifestyle funds which are often offered as default choices by many stakeholder and personal-pension plans typically invest heavily in stocks when savers are younger and can afford to take a long-term approach. These funds then automatically shift investors' money into less risky assets as they get closer to retirement age, on the basis the saver will soon want to cash in their plans to buy an annuity. The idea behind this is that investors should not risk a sudden plunge in the value of their savings in the final few years before retirement, since there may not be time to recover their losses. However, since pensions freedom has made it much simpler for savers to draw an income directly from their pension funds, the number of people buying an annuity at retirement has fallen dramatically.
The FCA is concerned that many savers who began pension saving before the 2015 reforms have opted for the lifestyle approach or been placed in such funds as a default by their provider but will no longer want to buy an annuity on retirement. In this case, their savings may be still moved into low-returning assets even though that's not necessary.
Some pension providers are slowly moving to solve this problem. Standard Life and Scottish Widows have both told investors they are now changing the asset allocation of their lifestyle investment funds. Both are seeking to ensure investors will have more exposure to potentially high-growth assets, even as they get closer to retirement. However, not all providers have yet taken similar steps. And even where they have made adjustments, the asset allocation of a lifestyle fund may still not be appropriate for all investors' needs savers may need to act for themselves.
Are you getting a poor deal?
Company pension-scheme members who opt for the provider's default investment fund may be getting a poor deal new research suggests that the performance of default funds varies enormously.Pension consultant Punter Southall Aspire (PSA) said its analysis of nine default funds run by large providers of company pension schemes suggested savers were facing a retirement-income lottery when investing in default schemes. While the best-performing fund in the study, run by Aegon, had delivered an 11.4% return over the previous three years, the worst, from Standard Life, had achieved just 6.5%.
The different returns achieved by default funds may in part reflect the different asset-allocation strategies adopted by scheme providers, with some providers arguing that a less risky investment profile is more appropriate for funds offered to large numbers of savers as a default. However, given that 90% of the seven million savers who have joined company pension schemes since the start of the auto-enrolment reforms have opted for default funds, employers need to make sure they are holding providers to account, says Punter Southall Aspire.
Expat pensioners need not fear Brexit
Some 1.2 million British pensioners living in another European Union country will continue to see their state pension from the UK increase each year once the UK leaves the EU in 2019, ministers have promised. Ministers intend to continue offering these pensioners the same increase each year as enjoyed by pensioners in the UK, despite fears about the position after Brexit, draft legislation just published by the government shows. National insurance contributions made while abroad will also continue to count towards the British state pension.
The assurance will relieve EU-based pensioners who had been concerned they would end up in the same position as thousands of British pensioners living in countries such as Australia, Canada and New Zealand. These pensioners get the state-pension rate payable in the year they reach the UK's state retirement age, but do not get any subsequent increases. Over time, inflation steadily erodes the purchasing power of their income. The deal for British pensioners has yet to be formally agreed with EU negotiators, but they have published their own guidance that is almost identical to the UK's position, suggesting this is one area of Brexit talks where consensus has been reached. However, the deal is likely to anger British pensioners in countries where the lack of a similar agreement means their incomes have been frozen.
Tax tip of the week
The government introduced "flexible" individual savings accounts (Isas) last April. If your Isa is flexible, you can withdraw cash and put it back in during the same tax year, without reducing your current year's allowance. Previously, if you put £10,000 into an Isa, then withdrew £3,000 before paying it back in again, this would have taken up £13,000 of your Isa allowance. With a flexible Isa arrangement, the same actions would only take you £10,000 into your allowance. But it's up to individual providers as to whether or not they make accounts flexible. Even where providers offer flexible options, some do not apply this to their fixed-rate Isas. Innovative-finance and stocks-and-shares Isas can also be "flexible", but few providers offer this.