Century of change in just two decades
When I look at how the pensions landscape has evolved in recent decades, we have probably experienced more change in the last 20 years than in the previous 100.
With that in mind, it is vital that if you keep up to date with these changes and how they might impact you.
One of the big pluses is that you have far more choice today than you would have had in the past. It is in the field of investment where we have seen major change.
Traditionally, many of those who save for retirement would have put their money in a managed fund that offered a reasonable mix between shares bonds, property and cash.
What caught out many back in 2008/09 was the realisation that funds like this often had a minimum level of equities that they must hold, ir respective of how markets are performing.
In recent years, we saw more people adopting the “lifestyle” or “Target Date” approach. Under this strategy, it means that your money is automatically switched from higher to lower risk assets, typically starting from about 15 years from retirement.
Another major change has seen the rising popularity of passive investing. This is where decisions on the investment of your money is linked to the make- up of a stock market index such as the FT SE 100. If a share makes up 1.5% of the index, then 1.5% is used to purchase that share.
The opposite approach is active investing where your money is allocated using the research capabilities and investment skills of fund managers. Passive investing has grown hugely in popularity due its consistency in performance, transparency and often lower cost.
Another innovation in investing is the increased focus on risk management.
Up to now, risk was managed by ensuring that there was broad diversification of your fund, meaning that no one share, sector or asset class could individually cause the value of your holdings to fall substantially.
In addition to diversification, we have added “Target Volatility strategies ”. Using this approach, our Prime Funds allocate money across over 5,000 shares and a wide suite of property, bonds and cash. In addition, if markets become more nervous, or volatile, the amount held in shares is automatically reduced.
As markets become calmer, the amount held in shares increases subject to maximum amounts which are dictated by your stated attitude to risk.
This approach has proven its value during more some of the recent bouts of stock market disruption.
The key question is, with all of this innovation that we have witnessed, what is the best solution? A key contributor to answering this is to start with the end goal in mind. The investment of your money must reflect what you want at retirement and on how you want to draw down your benefits.
Again, you have more choice now than you would have had in the past.
The traditional approach was that you would draw down 1.5 times your final salary as a tax- free lump sum, so long as you have achieved sufficient service.
The remainder was used to buy a guaranteed income for life.
The challenge in recent years is that the rate at which you can buy this income or the “annuity rate” has fallen. In other words, you need a bigger pot of money to ensure you can buy an adequate income.
The reason why annuity rates have declined is due to falling government bond yields and even more im- portantly, because people are living a lot longer.
At Bank of Ireland, we find that only those that have no other choice are going down this route.
If you are selecting this approach, it is important that as you near your retirement age that your money is moved to cash and bonds in a proportion that reflects how much tax free cash you qualify to draw down.
The alternative approach is to draw down 25% of your fund tax- free and then use the remainder to invest in an Approved Retirement Fund (ARF).
You can select how you want your money invested. It is important, for example, if you are 55 and planning to retire at 65 and use the ARF approach, that you recognise that your investment horizon is not 10 years. It could be 30 years or more.
You do not have a guaranteed income for life so it is important that your ARF is achieving a higher level of growth than what you are drawing out of the fund.
While of f icial statistics put inflation at a negligible level, we know in reality that certain costs escalate in retirement, particularly those associated with healthcare.
This is the time of the year that many individuals sit down with use to discuss this vitally important subject of helping you to achieve a decent income in retirement. You need to see is what you have on track and is it fit for purpose.
Is your money in an older style contract that may be expensive with a higher charging structure than you can avail of today?
Does the strategy you are using today reflect the options that you want to avail of when you reach retirement age? A big advantage for our customers is that they can readily keep in touch with what they have through Life Online. Every time they log onto online banking at Banking 365, they can see an up to date valuation of their funds.
The pensions landscape has evolved and it will continue to see further change.
The ESRI predicts the age at which you get the state pension will move to 70. The key to ensuring that you don’t get any negative surprises when you reach retirement age is to get really good quality advice now and on an ongoing basis.
Pensions have seen dramatic changes for today’s workers, in some cases taking previous generations completely by surprise.