Default Pension Scheme Funds – Are They Any Good?
Largely thanks to auto-enrolment, most pre-retirees are now subscribed to their work-place pension scheme. Frankly, this is a huge, positive step forward for retirement planning, as it means that more of us are saving on a personal basis, and taking the steps to secure a more comfortable future.
However, do you really know where your money is invested? Unless you review your pension on a regular basis, it is unlikely that you will be aware of your pension’s performance, or indeed which funds house your money. If you, like many others, do not review your pension on a regular basis, it’s likely that you will be invested in the ‘default’ fund. So, what does this mean?
Default funds are often very mediocre in their nature and are designed to fulfil the investment needs of the mass market. Whilst they are not necessarily ‘bad’ funds, they rarely top the performance charts. These types of funds may be suitable for some people, but you do not have to just settle with these selections.
Most pension schemes will normally offer you some choice over funds, so if you are keen to look at ways to potentially improve performance, you can elect to be a little more selective. If you are looking to do this, however, there are some important questions that you to need ask:
Are the selected funds suitable for your tolerance to risk?
High risk investments can offer higher returns, but they tend to be more volatile and can experience sharp declines. When you pick funds for any type of investment, it’s important that you consider how much risk you are willing to take and assess what you are willing to lose. Your attitude to risk will change throughout your life too, so continually reviewing your circumstances and goals will help to determine how much risk you can afford to take and make necessary adjustments as you go.
What types of funds or asset classes will best help you to fulfil your goals?
Some pensions are ‘lifestyled’, meaning that your money can be almost entirely invested in cash in the final years before you retire, which is easily eroded and generally offers low returns. This may meet your needs, but you do need to question if this is the right approach if you intend to leave your pension invested throughout your retirement.
Are the funds in tune with your ethical views?
Funds are usually available from a wide range of industries and sectors, but some of these may be tobacco, oil or politically motivated investments. In recent years, there has been a surge in investments offering more ethical offerings (ESG), which aim to place your money in more responsible investments that make a positive impact on the world and society. Each fund will perform differently, so this consideration must be taken into account, but if you are averse to certain industries or practices, it may be worth looking at incorporating funds that are inline with your moral standpoint.
Will the scheme allow flexibility when you draw from your pension?
Not strictly fund-related, but it is worth considering whether the pension scheme you invest in allows for flexi-access drawdown (FAD). A scheme that does this allows you take your pension when and how you need it, rather than you being forced into taking an annuity when you retire.
In our opinion, it’s vital that you continually review your pension, or any other part of your financial planning for that matter. If you would like us to help, we will happily look at your pension scheme in your next Annual Review, to ensure that it fits with your long-term financial planning goals.
Take a Look Past the Fog
November has been a changeable month to say the least. Take the weather for example; gone are the clear and crisp October mornings, to be replaced with ever-present Autumnal drizzle and fog. But the weather is not the only thing that is unclear: the news, especially surrounding COVID and the economy, have seemed to erred on the side of dismal and obscure.
When it comes to the media’s reporting of current events, recent studies show just 10% of daily news stories focus on ‘good news’, leaving 90% of the reporting we consume taking on a very negative tone. But what has this got to do with your money?
Many investors are using the news as a barometer to gauge when to invest. This does make sense to a degree, but the issue is that it means they are not looking forward and are instead focussing on the here and now. In order to create an investment strategy that enables you to meet your goals, you need to look through the current ‘fog’ and media negativity and focus on the ultimate destination. There will be many bumps along the way, but a good, diversified strategy will help to minimise your losses and smooth over any short-term falls.
To put this into context, Gavekal, a research firm, asked their readers what the most important financial event of 2007 was. Most of the respondents said the ‘Global Financial Crisis’; however, the most important event was Steve Jobs launching the iPhone, which completely changed the way we interact with the world around us.
Despite the initial boom in Apple shares, they too were hit in 2009, when they fell by 50%, along with the rest of the market. However, since the world has moved on, Apple shares are up 36 times there 2009 low. This just demonstrates that long-term trends will generally supersede short-term losses.
As another example, in 1989, the world was obsessed with the fall of the Berlin Wall, but Tim Berners-Lee had just created the World Wide Web; looking back, which was more important?
Whilst the murky ‘pea-souper’ of COVID-19, Brexit and the US Presidential Election combined have created a feeling of market unrest and turbulence, we must try to see past these temporary blips and look forward to the future.
I doubt many of you are losing sleep over the fall of the Berlin Wall, the Greek Debt Crisis or any other major event over the last 50 years at this point? Whilst it can be scary when you can’t see too far in front of you, temporary, short-term losses now will be a distant memory in the near future.
If you are concerned about your current investment strategy, and would like to assess how better diversification may help to smooth over your temporary losses, we’d be delighted to help.
Our Second Opinion Service
There is an increasing feeling of anger and unrest amongst 60-somethings at the moment, who feel that their lack of planning will cost them their ability to retire. Believing that they would be able to rely on the State, pre-retirees are now faced with 10 more years’ hard labour, and face even more uncertainty in relation to COVID-19. Even those who did put money aside are being faced with complex legislation, disjointed planning and excessive charges that threaten to erode their wealth. It’s a ‘Baby-Boomer’ crisis!
But it is never too late, as long as you take action. If you don’t want to have a future uncertainty, the prospect of never retiring, or not having sufficient wealth to enjoy your later years, it’s time to detox your finances.
Get on the Right Track with a Financially Fit Plan
If you don’t know where you’re going, how will you ever get there? By deciding on your future goals now, you will be able to assess how much you will need in the future, how much you need to save now, and what actions you could take to safeguard your wealth. If you’ve not got a plan, make one now!
Utilise a Fitness-Tracker for Your Money
Having a financial plan is crucial to your future success, but you need to continually review how it’s performing. Monitoring your money’s heart rate will mean that you identify the shortfalls and highlight any prospects you can maximise. We would always recommend using a professional to review your finances, as they will be able to use their expertise to identify any issues or opportunities that you may have overlooked or are not even aware of.
Ditch the Calorific Charges
Sadly, many old pensions and investments, especially those spread across a plethora of platforms and managed by advisers who you no-longer work with, come laden with excessive charges and penalties. To counter-act these potentially damaging fees, it is important to review what you currently have and compare your portfolio with alternative options. It may not be suitable for everyone, but it can be beneficial to look at consolidating your investments into a more flexible and diverse strategy, which could help to give you more transparent administration, lower costs and more control.
Flex Your Financial Muscles by Maximising Your Allowances
Tax is a necessary evil in some cases, but make sure you’re not overpaying. Each year, investments such as ISAs and pensions offer investors an annual allowance, which will enable you to save tax-efficiently and make the most of your money. Make sure you understand what is available for you and your personal situation and, if suitable, take full advantage of the allowances available.
We want to help people to clearly see if what they have really is the best solution available. To achieve this, we would like to remind you about our Second Opinion Service, whereby we will offer any potential client you refer to us a FREE Portfolio Review, where we can ‘health check’ their finances to see if there are any omissions, missed opportunities or room for improvement.
If you have any friends or family who are dissatisfied with their current adviser, or indeed feel that they need expert guidance, please email [email protected] or call 01572 898060 and we’d be delighted to shed some light on their financial situation and get their money fighting fit.
A Time to Reflect and a Time to Review
Health has become our most important concern over the last year, but so has our future wellbeing.
For many of us, achieving security and certainty over the future means saving into personal pensions and investments, but how will the threat of a new wave of COVID-19 impact the markets and what could this mean for your future financial security? Will the health of your investments deteriorate? Is there anything you can do to keep them safe?
2020 saw the sharpest fall in stock markets is any of our lifetimes, and whilst this may strike fear into even the hardiest of investor, it actually provides us all with a golden opportunity.
When markets are low, it is the perfect time to review your investments. This may sound counter-productive, but low returns enable us to assess past performance and give us a comparison barometer. Whilst past performance cannot guarantee future returns, it does give us an opportunity to look at what could bolster our portfolios, or what needs to be reviewed.
But what should you be reviewing?
As we all know, market fluctuations, tax and a reduction in interest rates can all damage the return on our savings; however, it’s also important to consider how risk can also make an impact. Keeping money in cash may feel like the solution here, but in reality, cash is not riskless, and its value will also fall over time due to inflation, thus reducing your purchasing power and jeopardising your future goals.
So, how can you make your cash work harder and reduce the amount of risk you are exposing your wealth to?
Diversification is key here. Putting all of your eggs in one basket, for example one asset-class like UK shares, could mean that all of your hard-earned money can be wiped out in one fell swoop. By electing to employ a diversified strategy you may still experience losses on some of your assets, but you could also see gains in other areas, hence your overall performance will be smoothed over time and the impact of losses is greatly reduced. However, it’s crucial to keep your investments continually under review, so that suitable adjustments can be made as required.
When it comes to pensions, having numerous pots strewn here and there can actually be damaging to your overall objectives. Time and time again we hear the same concerns about ‘untended’ and scattered pensions: it’s hard to keep track of performance; it’s an arduous task to monitor or review what’s in place; there are a multitude of fees and charges; the administration is a burden; and it’s unclear if there are sufficient funds for retirement.
Pensions can be quite complex and are governed by various regulations, come with differing benefits, and can sometimes be subject to underhand tactics like exit penalties. It’s important to look at the pros and cons before you commit to any type of consolidation, to make sure it’s suitable for your specific needs. Pension consolidation may not be appropriate for everyone, but if you are considering a ‘spring clean’ of your pensions in the new year, we strongly recommend seeking the assistance of an independent expert.
Times of crisis are a stark reminder that financial planning should be on everyone’s agenda. Money can be the root of worry, but it can also be your ticket to security. Whilst reviewing your pensions and investments after a market shock can feel counter-intuitive, it is often the best time because you can see how resilient your current arrangement were, you could incur fewer charges and tax to move, and you can ensure it is positioned well for a market upturn.
If you would like help reviewing your portfolio, we would be delighted to help.
Charlie’s Mini Blog
In this month’s book recommendation, I talk about the importance of actually thinking about death as part of your Estate Planning. When you head blindly into anything, it usually ends badly, and death is no different. Whilst I wasn’t sure there is a good way to die, David Jarrett’s book definitely changed my view on that.
Estate Planning isn’t just about making sure what you want to happen to your money on the day you die actually does. It is about so much more. It is about making sure that in the event of an illness or an accident, the people that you trust can make the best decisions for you; the decisions that you would have wanted them to make. It’s about making sure that the greatest legacy possible is passed onto the next generation, without being eroded by tax. It is about making sure no one inherits too much money too early in life, and to avoid the son or daughter in-law from hell wandering off with your hard-earned cash. It’s about preserving some of your estate should you end up in a care home, but also making sure there is enough money so that care home can be somewhere you’d actually be willing to see out your last days, week or even years in.
There is so much to think about from a health and finance point of view when it comes to an Estate Plan, but there is much more than that. There are the practicalities of the situation too, like who has spare keys, are key documents locked in a safe no one knows about and where do you keep your passwords for your digital world? How would you pass on your own life lessons and memories so they are not lost forever, and how can you ensure your future generations benefit from the aspects of life that you love the most?
There is a lot to consider when it comes to death. Clearly, it is always going to be a difficult time for the people around us, but creating a Plan can ensure that the experience is less stressful for everyone concerned, as well as ensuring that you can create a legacy that lives on long after you are gone.
This month’s book recommendation is one that has already featured in my Friday Footnote email, but it is so good and such an important read, I wanted to cover it here too.
As I always appreciate recommendations from different sources, when a client of ours suggested that I read the book ’33 Meditations on Death: Notes from the Wrong End of Medicine’ by David Jarrett, I was not immediately drawn in by the title, but I took his word for it and dived in anyway.
I can honestly say this should be a must read for everyone. It has made me see death, and how we approach it in a whole new light. If you want to ensure you are treated the way you want to be when the time comes, I encourage you to read this brilliant book. If you want a robust Estate Plan, reading this would certainly help you think about death in a practical and logical way.