15th September 2015 at 1:21pm
Recent market falls and media headlines have left many people concerned about the current value of their investments.
This is heightened for those approaching retirement. They may not have much time for the value of their investments to recover from any falls.
If you’re in this camp, the trick is not to panic and react too quickly. Instead, gather a few facts and assess what you need to do, if anything.
Think about your choices
First things first: how are you going to access your money? And are your investments aligned to that?
With the new pension freedoms, you now have more choices. This means that rather than buying an annuity, you can choose to remain invested after you access your money and either take a flexible income from your pension pot or take your money out as lump sums as and when you want to. Or, you can leave it untouched for more growth potential.
Different options need different investment approaches:
Leaving some or all of your money invested: as this could be for a long time (perhaps 30 years or more), you can take a longer term view. The longer you leave your pension pot invested, the more time it has to recover from short-term market falls.
Taking a lump sum: consider ‘de-risking’ your pension pot as you near retirement by moving into safer investments. Doing this could help avoid big falls in markets having a big impact on the value of your pot.
Buying an annuity: it’s important you invest in a way that provides stability to the income you’ll rely on, rather than protecting the pot of money you’ll use to buy it. This usually means investing in long-term government or corporate bonds as they are designed to offset the ups and downs of annuity rates.
The key question is do you know which option you’re going to take, and are your investments aligned to that?
Of course you may not yet know what you’re going to do, even if you’re close to the time when you’ll be taking some or all of your pension money. In that case, look to invest in a way which keeps your options open: one that gives your money some opportunity to grow but doesn’t expose it to risks you don’t need to take.
What type of pension do you have?
You may have your own personal pension, or you’re likely to be in one of two types of company pension scheme:
• a defined benefit (also known as final salary) where you’ll get back a set amount based on your salary and years of service – so market ups and downs won’t affect you at all
• a defined contribution (or money purchase) scheme where you, and often your company, make payments to boost the final amount you will get.
Some, or all, of your pension will be invested in one of the following ways:
In a company pension – and in their recommended investment option
If you didn’t make your own investment choice, your money will probably be in an investment strategy chosen by your employer, sometimes called a lifestyle profile. These are designed to move your money into investments that prepare your pension pot for when you retire or access your money.
Your money will have initially been invested in a growth fund. This would have had most exposure to investments affected by current market ups and downs. But, if you’re close to retirement, you should have – mainly – moved out of these by now. The only thing you should do is make sure the strategy you’re in fits with how you want to take your pension income.
Bear in mind that many lifestyle profiles still assume you’re going to buy an annuity – as that’s what most people did before April 2015. It’s worth finding out more on this; see our ‘Approaching retirement? Check your silver lining doesn’t have a cloud’ blog.
In a company pension – and made your own investment decisions
If you’re used to choosing and managing your own investments, you should be aware that recent big falls in the market could be an indicator of future volatility, rather than the result of a one-off catastrophic event. So if you have a strategy, you may want to adjust it for current market conditions and go from there.
If, however, you’ve made your own choices but are less confident about them, you may need to consider whether you’re invested the right way for you. There are many off-the-shelf options, such as the lifestyle profiles mentioned earlier, that delegate decisions to an investment expert.
Whatever you decide to do could make a huge difference to how much income you have in retirement. So make sure you’re honest with yourself about what type of investor you are and whether you’d be better delegating. In ‘DIY or delegation? The 5 investment Cs’, I give some pointers you may find useful when deciding what to do.
So, what do you need to do now?
Here’s a checklist to help you consider if you’ve made the right decisions for your circumstances:
- Check your investment choices are aligned to how you plan to take your pension income.
If you are in a lifestyle profile, remember many of these still assume you’re going to buy an annuity.
- Check you’re appropriately diversified – are your investments are spread across a range of assets – and are you happy with your portfolio given the outlook for more market volatility?
- If you’re not sure about what you are doing, speak to your employer, take advice or think about an off-the-shelf investment solution.
We have lots more helpful hints and tips on how to invest and what to think about on the MoneyPlus section of www.standardlife.co.uk
Join the conversation
Let us know if you find this useful by adding a comment below.
A pension is an investment. Its value can go up or down and it may be worth less than you paid in. Investment returns aren’t guaranteed. The value of your investments can go up or down and may be worth less than what was paid in.
This blog and any responses are not financial advice.