Take Time Out To Consider Retirement Fund Drawdown
Though pandemic-related restrictions and lockdowns decimated the incomes of thousands of business owners and selfemployed through 2020, the volume of pension savings held up relatively well. Bernard Walsh, Head of Pensions & Investments, Bank of Ireland Investment Markets, muses that when spending more time away from the workplace, people got an insight into what life in retirement might look like.
“Our customers are telling us that they recognise that they need to take steps to plan for retirement,” says Walsh. “A recent Bank of Ireland/Red C survey revealed that six in 10 people are thinking more about their financial future than before the onset of the pandemic. However, only half of those surveyed understand how pensions work, with men (59%) declaring a better knowledge of this area than women (47%).”
Although ESG is now the dominant theme in financial products, Walsh observes that the perception of the role of ESG in pension products is quite polarised. According to recent BoI research, six out of 10 people have never heard of the term.
Walsh adds: “Interestingly, while many lean towards the ‘Environment’ in ESG, from our survey, the G – for ‘Governance’ – is the most important issue. Investors share two fears: that strategies with ESG credentials would attract higher fees, and that performance would be diminished.
“What is clear is that a public education programme is needed. Bank of Ireland has aimed to lead in this regard through its Financial Wellbeing programme, familiar to many through its ‘F-Word’ advertising campaign and online resources. It will be looking at the specifics of ESG and pensions in the ‘Pension Pot’ free webinar series.”
While the ESG issue is important, Walsh’s view is that pension savers also need to learn more about drawing down their pension. Annuity rates remain at ultra-low levels due to people living longer and low interest rates, and both factors are unlikely to change trajectory for some time.
“How you draw down your retirement funds is one of the most important financial decisions that you will make,” Walsh advises. “This is a decision not to be made on the last day of your working career. It should be carefully considered many years before and may evolve over time, and that decision should dictate your pension investment strategy to a great degree.
“The majority of our pension savings flow into target date funds. The model is quite simple. When you are young, you want maximum growth, so the portfolio is heavily invested in assets like shares and property. As you near your retirement age, the portfolio de-risks in a manner that reflects how you will draw down your benefits.
“If you are going to draw down most or all of your pot as tax-free cash, then it de-risks to cash. If you want to buy an income for life or an annuity, then you would de-risk your fund into assets that are linked to annuity rates, which are long-term bond yields. 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 today to ensure you can buy an adequate income.”
People who place their pot into an Approved Retirement Fund are effectively extending the investment journey for 20 or 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. If you are too cautious in how it is invested, resulting in your withdrawals exceeding the growth your fund achieves, you will see your fund diminish and run the risk that you outlive your money,” says Walsh.
“The key to ensuring that you do not get any nasty surprises when you come to the end of your working life is to ensure that you get good advice now and on an ongoing basis.”
‘You need a bigger pot of money today to buy an adequate income’
One of the consequences of the transposition of the IORP II directive is to increase the governance requirements of trustees of occupational pension schemes, with cost implications for employers. Joe Creegan, Head of Corporate Life and Pensions in Ireland with Zurich Life Assurance, expects many schemes will consider moving from a single trust to a Master Trust.
“A Master Trust is one large scheme to which any employer can be affiliated,” Creegan explains. “Zurich Trustee Services, with years of experience as a trustee, will act as trustee to the Zurich Master Trust. This will allow existing and new employer sponsored pension schemes to comply with the new requirements, while giving employees access to Zurich’s superior investment performance, delivered consistently over many years.”
Creegan is in favour of reducing the number of products available during the pension accumulation stage, such as replacing Retirement Annuity Contracts and Buy out Bonds with a modified PRSA product. He notes that reaching retirement age brings an important checkpoint, where decisions need to be made regarding taking a lump sum or annuity versus Approved Retirement Fund, all of which require advice.
“While this could be accommodated with a whole-of life PRSA, the current ARF product serves this process well, and provides greater options in terms of investment choice compared with a PRSA, in its current form,” he says. Creegan adds that employer contributions to a PRSA should cease to be treated as a Benefit-in-Kind, and instead treated in the same manner as employer contributions to other arrangements.
“There is also a need to index the earnings limit on which the contribution rates are calculated, and the Standard Fund Threshold, which imposes a maximum fund at retirement. The current SFT disadvantages those individuals who make good investment decisions over the course of their working life, and should be indexed annually to reflect at least salary inflation, if not investment market returns.”
For pension investors, the most important metric is the growth in their investment over the long term. According to Creegan, irrespective of whether individuals look for products with green credentials, the Zurich view is that Responsible Investing is an overarching set of principles. “ESG investing is a subset, always with a view to delivering outperformance for investors,” he explains.