Pensions: How to age-proof yours

24th August 2011

Some pension pots have lost as much as 20% – the majority are down around 10% and those dwindled funds will probably have to buy an annuity (a retirement income for life) that has fallen in value as well thanks to our living longer and returns on UK government bonds hitting rock bottom.  

Only final salary scheme members can breathe easier, few moved into safe havens such as bonds, cash or gold. 

Most remain in so called "managed" or "balanced" funds with a mix of equities, bonds, property, and cash. These have not fallen as fast as the FTSE, although losses depend on how significant shares are in the mix.

Often, the "balanced" pension fund is the only one on offer if you have a work-based pension. This means if you don't like it, then you don't get the your company's top up.

So what do you do now? Is the current market turmoil awful or awesome? Is this the end of your retirement dream or a chance to take advantage of lower share prices?  But unless you are retiring very soon, it could be wrong to fixate on today's markets.

Where you go from here depends on age and likely retirement date. Mindful Money has assumed 65 if you are now 40 or older and 70 for younger people. There is, now, no fixed retirement age – it's down to ability and health rather than years.

I'm 25 – where do I go from here?

Firstly, congratulate yourself that you have a job and pension contributions to worry about – unlike many in your age group. There are no guarantees and the past is no prediction of the future, but you have 45 years to go and equity funds have substantially outperformed other assets over the past 45 years. You should not put all your eggs in one basket but if you can spread your money across world stock markets, go for it! 

 

I'm 40 and I am paying more than the minimum into my scheme. Should I worry?

What's the point? You have 25 years before retirement and a lot will happen – good and bad –  over that period. Even if you time a move out of shares and into bonds with perfection, there is no guarantee you'll move back into equities at the right time.

You'll probably be paying monthly contributions so you'll get more units in the fund on bad days to make up for the lower price.

If you're making additional voluntary contributions (AVCs), try to continue. If you stop, you probably never make them up in the future. And you'll lose any employer contribtions.

 

I'm 55 and the financial market is spooking me. What can I do?

Take stock – you have at least decade left. Ask about "lifestyle" pensions. These gradually move assets from risky equities to safer property, bonds and cash over your last five or 10 years at work so you avoid market shocks over the last few years.

Does it work?  Even over just 10 years, there will almost certainly be ups and downs in markets. Neither you – nor "experts" – can second guess these. The jury remains out on lifestyle – there will be winners and losers but you'll probably worry less. Some schemes have "lifestyle" as a default option – you have to untick it if you wish greater exposure to shares.

 

Alternatively work out your spending retirement spending pattern. By then, you probably won't have a mortgage or children at home or commuting costs. And you will have the state pension. If you're approaching retirement and have enough for you needs (rather than your wants), it could be time to derisk the portfolio with a move to cash.

 

I'm 65 – my fund is down and annuities are rubbish! Help!

Work, possibly part time, can keep you mentally and physically healthy as well as financially better off. You could combine this with deferring your pension with income drawdown or a fixed term annuity. These are complex so seek independent advice.

Calculating what you need rather than what you want remains good advice. Rather than wait for a share prices recovery grab the pension you can get by finding the best annuity (the "open market option").  

IFA Clifford Bird at Haywards Heath, Sussex based Investwise says: "It might be better to bite the bullet rather than regret what you might have lost. Waiting for recovery could mean missing out on two or three years' of pension income. There are many ways of holding on to choices while enjoying some retirement income."

Stephen Lowe at annuity provider Just Retirement also believes in keeping options open.

He says: "Test drive your retirement with fixed term annuities which give you a second chance. You do not have to sign up for your future income for ever at 60 or 65. When you are 75 or 80, your conditions may have changed – you might qualify for an impaired life annuity, for instance, because your health has declined or you may have been widowed."

 

More:

Get advice–  Find an independent pensions adviser.

Budget – work out what you need to support yourself in retirement using the Money Advice Service's budget planner.

Further reading:

Pensions: Is the government doing a Brown

The Pensions Advisory Service also has some information as has the website of the Government created pension scheme Nest.

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