Are you invested in your pension scheme’s default fund?
If you’re a member of your company pension scheme and haven’t chosen your own investments, there’s a good chance you’re invested in your scheme’s default fund. This is likely to be a ‘target dated,’ ‘target outcome,’ 'investment pathways’ or ‘lifestyle fund’. These types of funds are designed for savers who don’t make active fund choices. They automatically manage your investment strategy, changing as you get closer to retirement. This is called the ‘Glidepath’ process. Some target a flexible outcome, which is for savers who want to stay invested and keep their options open at retirement. Others may target a cash lump sum and assume you’ll cash in your savings at retirement.
However, the type of default fund most affected by ups and downs in bond markets are those that target an annuity (a fixed sum of money paid to someone each year, typically for the rest of their life) and assume you’ll use your pension pot to buy a guaranteed income at retirement.
Why has my pension value gone down recently?
Political and economic instability, such as the Russian invasion in Ukraine, increased inflation and the cost of living crisis can all have an impact on your savings and pension investments. Over the long term, short-term ups and downs should be expected. If you’re some way off retirement, you’ll have time to recover in the years before you retire.
It can be more of a worry if you’re close to retirement (within 10 years). If you’re in an ‘annuity targeting’ lifestyle or 'target dated' fund, your plan may have dropped in value. As you get closer to your retirement age, more of your investment is moved into long gilts, (which are bonds issued by the UK Government that usually have maturity dates of 15 years and longer). The aim of using long gilts is to preserve the size of the annuity you can buy on retirement.
What should I do if I’m in an ‘annuity targeting’ lifestyle or 'target dated' fund?
It’s important to remember what these ‘annuity targeting’ funds aim to do and how they invest to achieve those aims.
There are two main stages. When savers are still some way off from retirement, these funds aim to grow your savings. Then, in the final 10 years or so before you retire, they progressively move into long gilts and other types of bond with the aim of preserving the size of annuity you will be able to buy on retirement.
You can find out more about how our lifestyle and annuity target funds work here.
Why we use long gilts
Traditionally, government bonds have been considered a safer investment relative to other types of investment, especially company shares although, as we’ve seen, they can still go down as well as up in value. However, the performance of long gilts is actually a secondary consideration. The main reason for using long gilts in the glidepath process is to try to make sure the amount of pension you can buy via an annuity doesn’t go up and down dramatically in the years immediately before you retire.
Long gilts and annuity rates tend to move in opposite directions. So, if long gilts go down in value as they have recently, annuity rates tend to go up and vice versa. This means that when your pension fund goes down in value, the amount of annuity you can buy will typically not change much because annuity rates have improved. This means you can buy more or less the same pension regardless of whether your fund value goes up or down
However, the relationship between long gilt prices and annuity rates isn’t perfect and can be affected by other factors. So, there will be times when movements in long gilts don’t fully reflect movements in annuity rates, and vice versa.
If you don’t intend to purchase an annuity
Lifestyle and annuity target funds are designed for those who plan to purchase an annuity when they retire. This isn’t the only way of taking an income in retirement. We offer a range of funds that automatically get savers ready to take a retirement income in a variety of ways. These include:
Also, if you don’t purchase an annuity and opt for the alternative of ‘drawdown’, you can keep your funds invested and draw the income you need. The less income you take initially, the more is left in your pot to hopefully benefit from any ‘bounce back’ in investment values.
The value of an investment can fall as well as rise and isn’t guaranteed. The final value of your pension pot when you come to take benefits may be less than the amount paid in.
For more information on the lifestyle funds available through our Aegon Retirement Choices (ARC) or Scottish Equitable Pension Accounts, please visit the Aegon lifestyle funds hub.
Or for TargetPlan or Aegon Master Trust, you can find out about our LifePath default options here or sign in to your TargetPlan account.
You can also find out more about your fund’s risk rating and where it invests on the fund factsheet, which can be found on the ‘Fund prices and performance’ page.
Please speak to a financial adviser if you need any help in making investment decisions. If you don't have a financial adviser, you can visit moneyhelper.org.uk/choosing-a-financial-adviser to find the right one for you.
Please be aware that we do not offer investment advice.