Three quarters of a million over 55s have seen their retirement funds plunge in recent weeks because pension funds are investing using methods that predate the reforms introduced in April.
As part of Telegraph Money’s wider campaign to ensure the new reforms – aimed at giving savers access to pension cash – are fully implemented, our investigations have shed the light on an investment practice which is costing savers over a billion pounds, or 9pc of their individual pots.
This latest problem affects savers regardless of whether or not they are given“bank account” style access to their cash now. It relates to how pension companies are investing their money – and in particular whether they are using a technique known as “lifestyling”.
“Lifestyle funds” were invented for savers who, at a predetermined retirement date, would convert their pension cash into an annuity paying an income for life.
The funds work by gradually moving savers’ money out of risky but high-growth assets like shares and into “safer” assets such as bonds and cash, as their retirement date approaches.
For example a 60 year-old aiming to “retire” might have their money split 30pc in shares, 50pc bonds and 20pc cash. By the time they reach age 63, they might have 50pc in bonds and 50pc in cash. Usually by the time savers reach “retirement age” – or the point at which they were expected to buy an annuity – all their money is held in low‑risk assets.
The new pension freedoms have changed the way people are set to use their savings, with the most significant change being that millions of people who would previously have bought an annuity will now not do so.
Instead, they are likely to make ad hoc withdrawals from their pension pot while leaving much of it invested for longer.
As a result, the “lifestyling” concept of reducing risk before people retire no longer holds.
Not only is the principle irrelevant, it actually jeopardises savers’ wealth unnecessarily by moving money into bonds at what could be a disastrous moment. Current volatilty in the financial markets, and bond prices in particular, has already cost investors dear (see below).
Following our questions on this matter Aviva, Britian’s biggest insurer, said it would “update” the lifestyle strategy it has used for decades to coincide with the new pension freedoms. It will no longer assume savers are going to buy an annuity and its fund managers are in the process of altering the processes it uses to pick investments.
But others say this type of action comes too late.
Alan Miller, a fund manager who founded his own group, SCM Private, in part as a protest at industry practices, said: “It is scandalous that losses on this scale have occurred within supposedly ‘safe’ funds. Investors are literally paying the fund industry to lose their retirement pots.
“The people designing these strategies have a tick-box mentality and lack common sense. Lifestyle funds are no longer fit for purpose.”
Even the asset management’s own trade body, the Investment Association, admits the problem.
Jonathan Lipkin, director of public policy at the IA, said that in light of the new freedoms pension schemes were “confused” about how to oversee pension cash.
He added that a handful of the newer pension funds – including the government-appointed National Employment Savings Trust – are rejecting the idea of old-fashioned lifestyle funds. Instead, they have developed new types of funds that better suit savers who want flexible access to their cash.
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Why lifestyle funds have fallen in value – and could go lower still
Lifestyle funds have suffered badly in recent months.
The biggest reason is that lifestyle funds, as they migrate savers’ cash into “low risk” bonds toward the savers’ expected retirement date, typically choose “long-dated bonds” – those which won’t mature for several decades. Doing so made sense where savers were going to buy annuities, because long-dated bond values should rise to compensate for any drop in annuity rates.
Data compiled for Telegraph Money by Hargreaves Lansdown, the broker, reveals lifestyle funds have lost an average 9pc just since February. Those dramatic losses result from the fact that long-dated bonds are at the epicentre of a bond sell-off.
Investors have been offloading them as prospects increase of an interest rate rise in the US and here.
Of Britain’s biggest funds owning bonds with a long maturity date the worst performing are run by pension giants Aviva, BlackRock, Friends Life and Scottish Equitable. They have all lost more than 10pc over the past six months, according to data from Lipper.
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: “Hundreds of thousands of pension savers have been sleepwalking towards the summit of the bond market. We don’t yet know if there is a gentle slope or a sheer cliff on the other side, but the recent bond sell-off serves as a wake-up call to everybody nearing retirement with a company pension.
“These funds will struggle in a rising interest rate environment, and were certainly never built to withstand the recent pension freedoms.”
On top of this, since the end of February the “cash” funds used to house billions of pounds of older savers’ money are proven to be a guaranteed way to lose money. This is because the charges on the funds outstrip the returns.
This was not the case when most of these funds were set up, because interest rates were then high enough to exceed the charges.
For example, the average cash fund in the ABI Deposit & Treasury sector made a 0.03pc loss over five years.
What should I do if my money is in a lifestyle fund?
If you are approaching retirement, have a company pension, and you haven’t selected your own investments, then chances are that you have money invested in a lifestyle fund. Your pension provider will be able to confirm this, but be aware they are also sometimes called “annuity protector funds”, or “pre-retirement funds.”
Steve Patterson, managing director of Intelligent Pensions, a retirement advice firm, said most savers aged between 55 and 65 needed a higher equity exposure than most lifestyle funds provide. This is because equities give them a better chance of inflation-beating returns, which will ultimately provide more income in retirement. The first thing to do is find out what other funds are available from your pension provider – beware that alternatives sometimes carry higher charges.
You then need to work out how much risk you can afford and want to take. If you’ve got other savings – such as Isas or a final salary scheme for example – the way these are invested will play a part in determining how you invest your pension cash. You can probably afford to take more risk if you’re carrying on working – or even semi-retiring – as you are less likely to need your savings now.
Mr Patterson warned that if you want to spend most of your pension at the beginning of your retirement you need to follow a more conservative strategy.
Do you have a problem with your pension? We want to hear about it. Email [email protected]
[“source – telegraph.co.uk”]