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,’ or ‘lifestyle' fund’.
Default funds are for savers who don’t want to make active fund choices. They automatically change the mix of funds you invest in as you get closer to retirement (we call this the ‘Glidepath’ process).
Some default funds 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. Alternatively they can target an annuity purchase, which assumes you’ll use your pension pot to buy a guaranteed income at retirement. An annuity is a fixed sum of money paid to someone each year, usually for the rest of their life.
Why has the value of my annuity target fund gone down?
In an annuity target fund, as near your retirement date, you’ll be invested mostly in fixed income assets, in particular UK government bonds. UK government bonds (or gilts) are typically considered a safer investment relative to other types of investments, for example equities (company shares, although your investments can still go down as well as up). However, the performance of gilts is actually a secondary consideration. The main reason for using gilts is to try to preserve the size of the annuity that you can buy at retirement.
Gilts and annuity rates tend to move in opposite directions. So if gilts go down in value, 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 a similar pension (or guaranteed income) even when your fund value goes up or down. However, the relationship between gilt prices and annuity rates isn’t perfect and can be affected by other factors. Therefore, there will be times when movements in gilts don’t fully reflect movements in annuity rates, and vice versa.
Political and economic instability as well as changing interest rates are some of the factors that can contribute to changes in the value of gilts. When gilts fall, those in annuity target funds will likely see their pension values drop.
How do I know if an annuity target fund is right for me?
It’s important to remember what these 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 years before you retire, they progressively move into gilts and other types of bonds 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.
If you don’t intend to purchase an annuity
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:
Flexible Target - for savers who want to keep their options open when they reach retirement.
Annuity Target - for those who intend to purchase an annuity when they retire.
Cash Target - for those who want to take their pension savings in a lump-sum when they retire.
Also, if you don’t purchase an annuity and opt for the alternative of ‘drawdown,’ you can keep your funds invested and take an income. The less income you take initially, the more is left in your pot to hopefully benefit from any ‘bounce back’ in investment values. However, there are no guarantees.
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 range, 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.