Bonds slump knocks 5% off ‘safer’ lifestyled pots
Just one in five of those saving into pensions are taking an interest in how their money is being invested, according to a survey, while automatic pension fund investment choices have seen the value of some retirement funds tumble in recent months.
The so-called ‘de-risking’ of certain pension funds the closer a person gets to retirement has had the opposite effect since the beginning of May, with Hargreaves Lansdown claiming values have fallen on average by 5 per cent.
The falls in values bears out a warning from Capita Employee Benefits, which found that just 21 per cent of workplace pension members are taking an active role in managing their pension investments, meaning many are unaware if their pots are performing badly.
An estimated three-quarters of workplace pension schemes operate ‘lifestyling’ strategies whereby pension investment is automatically moved from riskier equities and into supposedly safer bond funds to protect pension pot values the closer a member gets to retirement.
But while this has paid dividends as the value of bonds has surged on the back of the financial crisis and the Bank of England’s £375billion quantitative easing (QE) programme, recent months have seen fortunes turn as markets contemplate the end of international QE in response to rumblings from the US.
Laith Khalaf, of Hargreaves Lansdown, said: ‘Most company pensions switch workers’ savings into bond funds as they approach retirement to protect them from stock market falls.
‘However, QE has driven bonds to such high prices that these pension savers may find they are jumping out of the frying pan and into the fire.’
Hargreaves estimates lifestyle pension funds have fallen by 5 per cent since May 1, while annuity rates have also suffered a slight fall of 1 per cent. The combined effect of these on a £100,000 pension pot would be £265 less a year in income, or £5,300 over 20 years.
It’s a double whammy for pension savers in that bonds and annuity rates have fallen recently, even though annuity rates tend to rise when the price of bonds fall.
But this correlation is by no means guaranteed, and as such those pension savers whose pots have suffered falling bond prices will not be compensated by more attractive annuity rates were they to cash in now.
The importance of understanding risk and where your pension money is invested cannot be understated as automatic enrolment is rolled out.
David Tildesley, of Capita Employee Benefits, said: ‘The design of the default investment fund will need to ensure competitive returns; but there is a clear need as well for further education around risk and the role it plays in driving performance.
‘Low contributions into low risk funds are a recipe for low income in retirement.’
Hargreaves Lansdown has said those who do not feel lifestyling is appropriate for them as they approach retirement should consider shifting their investment either to cash – which should at least hold its value – or absolute return funds, though they too can fall in value.