Many pension investments still set up to prepare for annuity purchase.

22nd July 2015

The most radical pensions overhaul in nearly a century has arrived and whilst the changes are a positive way forward for retirees, the increase in flexibility and choice has also brought more challenges than ever before for individuals.

WEALTH at work, a leading provider of financial education and advice in the workplace, are concerned that the way pension assets are being managed as individuals approach retirement, may no longer be appropriate in light of the recent pension changes.

The issue is that many people make no active investment decisions for their pension, and therefore end up in a default “lifestyle fund”. What most of these funds have in common is that around 10 years before an individual retires, these funds tend to slowly move assets out of equities into safer investments like bonds and cash.

This is a good move if you want to buy an annuity, and don’t want the risk of your portfolio suddenly plummeting as you retire, but might not be the best strategy if you are planning to choose income drawdown, where you are likely to benefit by keeping more of your assets in equities.

Jonathan Watts-Lay, Director, WEALTH at work comments, “I believe that many people could be heading towards retirement not knowing that their assets are being prepared for an annuity purchase, when this may not be what they want. Everyone needs to check how their pension assets are invested in the 10 years before their planned retirement date to ensure they are invested in a way which is appropriate to how they are planning to take their retirement income.”

He explains, “It is such early days in the reforms that many pension schemes have not yet agreed on the best way to invest for drawdown just as many individuals haven’t decided whether they want to take their whole pension fund as cash, buy an annuity, go into drawdown, or a combination of some or all of these. Individuals within 10 years of retirement need to talk to pension scheme providers to ensure their choice of assets are appropriate to their needs.”

He continues, ”Making retirement decisions 10 years before retirement is a new idea for many, but is incredibly important, as given the new rules, choices need to be made much sooner. Financial education is important to help individuals have confidence about what they should do next to make their selections, and whatever their needs, they need to constantly review this over the 10 years as things may change. ”

Further coverage can be found in This Is Money.
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