Are you invested in a lifestyle fund?
Are you invested in a lifestyle or annuity target fund and do you know what that means?
As you approach retirement it’s important to keep a close eye on your savings. If you’re invested in a lifestyle or annuity target fund (both assume you’ll buy an annuity when you retire) and are within seven years of retiring, you may have been exposed to the recent performance of long gilts (long-dated UK government bonds) and your plan may have dropped in value. This may be a concern, especially so close to retirement. However, it’s important to remember what our lifestyle and annuity target funds aim to do and how they invest to achieve those aims.
Lifestyle and annuity target funds were primarily developed as scheme default funds for pension scheme members who don’t make active fund choices. If you didn’t choose a fund when you joined your scheme then the chances are you’re in one of these funds. They automatically manage your investment strategy, changing as you get closer to retirement. There are two main stages. When savers are still some way off from retirement, these funds aim to grow your savings. Then, in the six or seven years before you retire, they move into investments that are designed to preserve the size of annuity you will be able to buy on retirement.
How does my fund change as retirement nears?
If you’re invested in a lifestyle or annuity target fund and are within six or seven years of your selected retirement date, your fund will gradually move into long gilts and cash in preparation for purchasing an annuity and taking tax-free cash when you retire. If you’ve already reached your selected retirement date, you’ll already have moved into a retirement fund which invests 75% in long gilts and 25% in cash.
For a brief overview of how our Lifestyle and annuity target funds change as you approach retirement, you can find more info here.
Recent performance of long gilts
In recent years, due primarily to quantitative easing (the Bank of England has been buying long-dated gilts), long gilts have performed positively and achieved returns above what would normally be expected.
However, long gilts are bought and sold every day so can also fall in value. Gilts often fall when concerns surrounding inflation rise. Recently, market uncertainty in the wake of the vote to leave the European Union has seen sterling weaken and concerns about inflation rise. The long gilt market has reacted to that and since mid-August has fallen in value.
How long gilt performance affects our lifestyle, annuity target and retirement funds
For these types of funds, the performance of long gilts is a secondary consideration. The main reason for using long gilts in the lifestyle process isn’t to preserve or increase the value of your fund. Instead, they are used to try to make sure the amount of pension you can buy via an annuity doesn’t fluctuate dramatically in the years immediately before you retire.
Why we use long gilts
Long gilts are used in lifestyle funds because they tend to have an inverse relationship with annuity rates. In simple terms, this means that when one goes up, in normal circumstances, the other will go down. So when the value of long gilts goes down, annuity rates tend to go up and vice versa. The net result of this relationship is that the size of annuity (pension) you can buy at retirement stays roughly the same whether long gilts go up or down.
However, the relationship between long gilts and annuity rates isn’t perfect and can be affected by other factors. Therefore, 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, but this isn’t the only way of taking an income in retirement.
Reflecting the broader choices available, we’ve designed a new range of funds that automatically get savers ready to take a retirement income, and offer different ways of doing this. The three types of fund 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
You can find fund factsheets for all of our lifestyle and retirement target funds here.
The value of investments may go down as well as up, you may get back less than you originally invested. We review these funds regularly and may change them if we believe it’s in the best interests of investors.
Please speak to a financial adviser to find out more.