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Sarah Ackland Head of UK Funds, Architas
Since 2015, the retirement landscape has shifted with new government rules around pension freedoms allowing individuals more choice in how and when they access their retirement savings. Individuals now have the option to leave their pension pot intact until retirement or start accessing it from age 55; secure a guaranteed income with an annuity or employ flexible income options by remaining invested; take cash out in amounts to suit personal requirements or access their whole pension savings in one go. The freedoms also allow individuals to combine options. Unsurprisingly, as a result of the new rules, the way retirees have accessed their pensions over the past five years has changed significantly. From April 2015 to July 2020, retirees have opted for pension withdrawals totalling almost £37bn. Somewhat surprisingly, considering the guaranteed lifetime income they provide, the take–up of annuities is also on the decline, with only 11% buying an annuity in 2018/2019 – down from 13% in 2016/2017. Yet the market is in a very different place today compared to 2015, and there are a number of issues those planning for retirement need to take into consideration. The impact of COVID-19 on stock markets is concerning for individuals whose pension savings are invested in them. The need to spread your investments across a range of asset classes to ensure they are properly diversified, with the aim to protect them from market volatility, is now key. The amount of money required to fund a comfortable retirement continues to grow too, yet with interest rates sinking to an all-time low in 2020, the ability to secure such an income has become much harder. Low interest rates mean any savings invested in bank accounts are unlikely to provide returns that outpace inflation over the long term. And with most banks offering savers rates of less than 1.5%, cash savings do not offer much in terms of annual returns to retirees anyway. Meanwhile, longevity risk – the risk of outliving your savings – is also a rising concern with the Office for National Statistics stating that improved healthcare and lifestyle changes are leading to more people living to 100. Never has it been so important to analyse your own personal retirement plan and understand your options in order to secure your income for the future. We hope this guide serves as a useful resource in helping to create a viable retirement game plan.
Managing risk and lifetime income sources in uncertain times
Choosing a retirement game plan
Finding the right balance
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What is the inflation outlook post COVID-19?
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Diversification drivers
3
Finding the best retirement game plan for you
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Helping you tackle the 'pension mountain'
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Multi-asset investing in uncertain times
Meet the Architas team
Architas help investors meet their investment goals through a range of multi-manager solutions. Here are the key people you need to know.
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Sarah Ackland, Head of Architas UK Funds
Sarah has been at Architas since 2014 and was promoted from head of UK proposition to head of Architas UK funds in September 2017. Sarah has responsibility for all commercial aspects of the UK business including distribution, marketing, proposition and business development. Before joining Architas Sarah spent the previous seven years as UK retail sales director at Thames River Capital and then F&C after its acquisition. Sarah previously worked in an offshore role for Friends Provident International as manager of the funds marketing and research team with responsibility for its international fund range. She has a Bachelor of Arts degree from Liverpool Hope University and holds the Investment Management Certificate.
Sheldon MacDonald, CFA, Deputy Chief Investment Officer
Sheldon co-manages the Architas Multi-Asset Active, Passive and Blended fund ranges, as well as the Architas Global Equity Income Fund and Architas Positive Future Fund. He oversees fund selection and manages the products’ asset allocation and investment strategies. He also leads fund manager research on global equity strategies. Before joining Architas in 2010, Sheldon was a fund of funds manager at Nedgroup Investments, part of Old Mutual plc. As well as running a variety of long-only multi-asset strategies, Sheldon has extensive experience in the hedge fund space and, prior to joining Nedgroup Investments, was head of derivative trading at Old Mutual Asset Managers in South Africa. Sheldon has a BComm in Financial Accounting and Economics and holds the IMC and is a CFA charterholder. He has over 25 years of investment experience.
Jonathan Arthur, Senior Multi-Asset Product Specialist
Jonathan joined Architas in May 2016 from Fidelity International, where he previously worked as an investment specialist for Global, US and Thematic equity funds. Partnering with portfolio managers, Jonathan was a key contributor of product and marketing knowledge, and the link between investment teams and clients. He first joined Fidelity in 2013 as a senior analyst on the fixed income trading floor. Prior to this, Jonathan worked at the Markets division of Thomson Reuters. He initially joined in 2009 as an investment management specialist, where he focused on quantitative equity and macroeconomic modelling. This led to his second role as a capital markets analyst in 2011. Jonathan has a degree in Business Management with French, CFA level 2 and the Investment Management Certificate.
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Important information All information correct as at 21 September 2020. We will not accept any legal responsibility for any advice provided in relation to this document. We provide and manage investments and do not assess the suitability of funds for individual investors. If any financial adviser, or network of advisers, is named on this document, it does not mean we have any knowledge of, or influence over, advice that you have received or will receive. Your financial adviser alone is responsible for any financial advice or recommendations provided in relation to your investment decisions. Past performance is not a guide to future performance. The value of investments and any income from them can go down as well as up and is not guaranteed, and you could get back less than you invest. AXA is a worldwide leader in financial protection and wealth management. Architas operates three legal entities in the UK; Architas Multi-Manager Limited (AMML), Architas Advisory Services Limited (AASL) and Architas Limited. Both AMML and AASL are owned by Architas Limited, which is 100% owned by AXA SA (a company registered in France). AMML is an investment company that provides access to other investment managers’ services through a range of multi-manager solutions, including regulated collective investment schemes. AMML is a company limited by shares and authorised and regulated by the Financial Conduct Authority (Firm Reference Number 477328). It is registered in England: No. 06458717. Registered Office: 5 Old Broad Street, London, EC2N 1AD. We recommend that you seek financial advice before making any investment decisions and do not enter into any investment transactions on the basis of this document alone.
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INTRO
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Where to begin?
Understand your pension statement Your statement shows: how much is in your pot, an estimate of how much you might get when you start taking your money, if your pension has any special features, e.g. guaranteed annuity rate, your ‘selected retirement age’ (the age you agreed with your provider or employer to retire), the ‘transfer value’ of your pot – the amount you would get if you moved provider or cashed in your whole pot. Annual summary statements are sent directly to you from your provider each year, but can be requested at any time
Understand different pension types
Check how much money is in your pension pot(s)
Find out what type(s) of pension you have
Check which pensions you’ve paid into If you can’t remember which pensions you paid into, you can find a lost pension through the official government Pension Tracing Service (www.gov.uk/find-pension-contact-details)
Defined contribution Defined contribution pensions are the most common type of pension today. Your pension pot is built up in your pre-retirement years, with money paid in by you or your employer (or both). This money is put into investments, which can go up or down depending on market movements. The proceeds can be used to buy a pension/annuity at retirement or the retiree can choose to drawdown income.
Defined benefit (final salary or career average) Sometimes referred to as ‘final salary’ pensions, defined benefit pensions are usually arranged by your employer. The pension paid out on retirement is dependent on how long you’ve worked for your employer and is based on calculations made under the rules of your pension scheme. Your provider guarantees a certain amount each year when you retire.
The ability of a pension to provide the level of income you need in your twilight years is very much dependent on when you start contributing during your working life. The most important factor in almost all cases is to start early
What independent support and advice resources are available?
The Money Advice Service is a free and impartial service set up by the government. The service has a retirement section offering pensions & retirement tools, pensions’ calculator, a retirement adviser directory and an annuities comparison table. Similarly, Pension Wise is another impartial service set up by the government in 2015. The site is predominantly for those approaching retirement, and provides ample information on new rules around pension freedoms. The Pensions Advisory Service (TPAS) provides independent and impartial advice and guidance about pensions, free of charge to members of the public. From workplace, personal and stakeholder schemes to the State Pension. The Money and Pensions Service brings together all three of these bodies under one umbrella. Described as an ‘arm’s-length’ body, the service is sponsored by the Department for Work and Pensions.
Pension calculator
Find out your future potential retirement income using a pension calculator, which can provide an estimated retirement income. This can include income from defined benefit and defined contribution schemes, plus the basic State Pension. There are many other pension calculators available online, apart from those used to calculate a retirement income, including: a pension tax relief calculator, pension lump sum withdrawal tax calculator - calculate how much tax will be paid when a lump sum is withdrawn from your pension, and a State Pension eligibility calculator.
When it comes to retirement planning, starting early is the key to the aim of achieving enough capital growth to generate sufficient retirement income. But where should you start?
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Below are the key tips, information support and resources that can help you you plan for a realistic and comfortable retirement
Check state pension entitlement
The ability of a pension to provide the level of income you need in your twilight years is very much dependent on when you start contributing during your working life. The most important factor in almost all cases is to start early: if you start contributing to your pension early in your career, you will have a larger pot of contributions to invest over a longer time period, which could lead to a larger pension pot and a better income when you retire. If you start contributions later, there are options to boost your income in retirement. For example, you can top up your pension pot, by either starting a new scheme or adding to your existing one. For tax relief purposes, the annual allowance for schemes is currently capped at £40,000. This is for both a defined contribution pension scheme and the total amount of benefits that can be built up in a defined benefit pension each year.
Is it ever too late to start a pension?
You can also delay your retirement, in order to allow your pension pot to increase or use the money over a shorter time frame.
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t is called ‘the pension mountain’ – the size of funds required by savers to afford a pension that keeps them in similar financial circumstances to their working life. And it is growing. Having leaped from £150,000 to £260,000 in just 15 years, there is every likelihood that the figure will go even higher, as younger generations face up to the challenge of failing to afford a house whilst employed and have to deal with rental costs in retirement.
But investing at a low rate for the long term often means your returns are unlikely to outgrow inflation, and therefore your pension pot will be much lower than needed at retirement. In addition, lump sums parked in a low-interest bank account do not generate much annual interest, and thus more people could be looking at a 'minimum' or 'moderate' income rather than comfortable. Meanwhile, there has been a continued increase in life expectancy. Matching this increase in life expectancy with an appropriate retirement plan is not easy; with pension values translating to a lower level of income than many expect there is a risk that retirees could outlive their savings. For all of these reasons, investors cannot afford to be complacent about current levels of retirement saving. While the government’s move to create an 8% mandatory pension contribution from a combination of the employer and employee from April 2019 is a “great start”, it needs to work more quickly to “nudge people up” to more realistic savings levels. “Without this, many millions of people will face a sharp drop in living standards,” says Royal London’s Helen Morrissey.
Meanwhile, research by Loughborough University and the Pensions and Lifetime Savings association (PLSA) identified three types of retirement income - minimum living, moderate and comfortable - that require significantly different levels of savings during an individuals working life if they are to be achieved. Individuals who manage to save enough for a retirement income of £10,200 a year (£15,700 for couples) will be able to achieve what it calls a minimum living standard which includes £38 on a food shop and a UK holiday but no car. Those who are able to save enough for £20,200 a year (£29,100 for couples) will be able to live a moderate lifestyle afford two weeks in Europe alongside a higher weekly food and annual clothing budget. At the higher end, those saving enough for £33,000 a year (£47,500 for couples) will be able to enjoy a comfortable retirement that includes holidays abroad each year, a generous clothing budget and a car.
The average UK earner will need a sizeable pension pot to maintain their living standards. This figure has leaped from £150,000 to £260,000 since 2002
We are all living longer according to the Office for National Statistics - how can we effectively plan for our financial futures?
100
to live to
if you are planning
Be prepared,
The prospect of living to 100 is daunting for most people. But with the Office for National Statistics (ONS) predicting the prospect becoming more likely, the need to plan for living this long is essential. Cazenove Capital and Schroders researched how much of their income a 20-year-old would need to put away if they wanted to save enough for a retirement that takes them from age 68 (the age at which they would start collecting their state pension according to current rules) all the way up to the age of 100. For the purposes of the calculations the research assumed the individual is aged 20 and earning £20,000. They have also allowed for a rise in wages with promotions at age 25, 30, 40 and 50 to £25,000, £30,000, £35,000 and £40,000, respectively, (although have not accounted for any bonuses). These wages would also rise in line with inflation (2.5%) throughout their career. In terms of pension payments the research also assumes that: 3% of the salary is put into a company pension with the employer putting in 4%; a further 8% of the gross salary is paid into a tax-efficient ISA (the allowance of which would also increase by the rate of inflation). Both pensions and ISA investments are assumed to return 5% a year after fees too. Finally, the state pension would rise based on current legislation of a minimum of 2.5% a year. In the example above, the value of a pension for someone starting at age 20 could more than double in the last 11 years of their working life. By the age of 67 the value of their pension could have grown to £620,191 (adjusted for inflation), according to the research. James Gladstone, head of wealth planning at Cazenove Capital, said: “The example we’ve given here is only theoretical – it’s just one way of doing it and nothing is guaranteed given that reaching the targets depends on future investment returns which are unknown. “But what it does show is the amazing potential power of compounding. Most people in their 20s have little cash to spare – but thanks to the length of time involved, even modest initial contributions can mount up exponentially.” Compounding refers to investment returns that are re-invested to attract further returns each time. According to Schroders, where individuals start saving young, the compounding process does much of the ‘heavy-lifting’ in terms of boosting returns.
esearch by Royal London finds that the average UK earner will need a pension pot of £260,000 to maintain their living standards. It’s called ‘the pension mountain’ – the size of funds required by savers to afford a pension that keeps them in similar financial circumstances to their working life. The figure has leaped from £150,000 to £260,000 since 2002. This figure could actually end up much higher, as younger generations face up to failing to afford to buy a house and then be hit with rental costs into retirement. This figure could actually end up much higher, as younger generations face up to failing to afford to buy a house and then be hit with rental costs into retirement. The £260,000 figure assumes that a worker on an average wage of £27,000 will draw a state pension of £8,500 a year on retirement and have generally lower travel and mortgage costs in older age. This will mean they require more than £9,000 private pension income to help them match their previous living standards.
2.5%
(AJ Bell)
Approvals for new mortgages in May dropped by almost 90% below February numbers
Higher loan-to-value ratios
For homeowners and buyers, low interest rates are good news because they mean lower mortgage rates. The government has also provided a boost for buyers by scrapping stamp duty on house purchases up to £500,000 until 31 March 2021. According to Laura Suter, personal finance analyst at AJ Bell, this move is already working to boost the property market. However, she believes the boost is “only likely to be short-term, and the future of the housing market – in particular for those living in premium locations in major cities like London – remains cloudy at best”. One of the issues is that mortgage providers have also not been immune to the impact of Covid-19,
90%
Less interest for savers
For savers, the low interest rate environment means that cash is absolutely out of the question as a long-term savings strategy. This is because as the BoE cuts interest rates, banks and building societies inevitably follow suit, slashing rates on savings accounts. The main focus for savers now must be on finding inflation-beating returns instead, according to Haynes.
This means leaving the safety of cash to make sure any long-term savings are invested in markets, although whether this approach is viable will depend on each individual’s risk appetite. “The lower for longer interest rates (and the possibility of negative interest rates) will mean that cash will provide negligible returns,” he said. “This will translate into negative real returns if inflation emerges.” Typically, rates can only be expected to pick up when inflation returns. And although we have seen some pick-up in inflation in the most recent figures, most experts agree any material rise will take time. As a result, Adrian Lowcock, head of personal investing at Willis Owen said “savers need to be active in managing their money so they can target higher rates and try to outperform inflation”. However, there is always a silver lining. Low interest rates means it could cost less to take out loans.
Typically when interest rates go up, bond prices go down, and vice versa
The coronavirus crisis led to unprecedented falls in stock markets and was undoubtedly a stressful time for investors. However, the recovery has also been remarkable, in large part thanks to the vast amount of fiscal and monetary stimulus.
Equities: outcome is mixed
But with so much uncertainty around, it can be difficult to predict which areas of the market will benefit and which are set for a long-term slump. Lowcock said: “Further stimulus and policies are likely and any changes in the current focus of investors on the few winners could mean investors in the wrong part of the market miss out on some gains. ”For example, returns from bonds are so low at the moment that there is “little appeal there and limited inflation protection,” Lowcock added.
Average pension fund returns in Q2 2020. In Q1 2020, pension funds saw a loss of 15.2%
Potential for lower income in retirement
An ongoing low interest rate environment brings with it the same issues that retirees have been suffering for the past decade. Namely low annuity rates and no return on savings.“ A worst-case scenario would be if interest rates stay low and inflation emerges, which would see purchasing power of savings eroded further,” said Haynes. Those already accessing their pension through drawdown are in the worst position, as they don’t have time to wait for assets to recover from the recent falls. For those people, it may be worth considering lowering their income for the time being to avoid running out of money sooner than expected. For those nearing retirement, there are still options such as delaying taking an income to allow the pot to build further, or lowering their income expectations.
Investing for income: mixing income assets together
Tom Selby, senior analyst at AJ Bell, said: “The difference in retirement outcomes as a result of the timing of negative investment returns can be significant. “Someone taking a 5% inflation-adjusted income from their fund who suffered a 20% hit in their first year in drawdown could see their pension pot run out after 18 years – three years sooner than if they suffered the hit ten years into retirement. By contrast, someone who enjoys 4% growth throughout their retirement could take the same income for 25 years.” He suggests that drawdown clients who are taking an income from their capital need to build a sustainable withdrawal strategy and review this regularly. Anyone who has other cash investments might consider drawing on these first to allow their pension assets more recovery time. But unfortunately, with many companies slashing dividends or stopping payments altogether during the crisis, even other income-producing assets may not deliver on their promise in 2020.
13.3%
Investors
Savings
Homeowners
Planning retirement
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Sheldon Macdonald Deputy Chief Investment Officer, Architas
The outlook for inflation and interest rates has changed drastically from this time last year
How will this affect everyone?
The information included here is not advice – always seek professional advice if you’re not sure which investments are right for you. Care has been taken to ensure the accuracy of this content, but no responsibility is accepted for any errors or omissions. Past performance is not a guide to future performance. The value of investments can fall as well as rise. Architas Multi-Manager Limited is a company limited by shares and authorised and regulated by the Financial Conduct Authority (Firm Reference Number 477328). It is registered in England: No. 06458717. Registered Office: 5 Old Broad Street, London, EC2N 1AD
What is the inflation outlook post Covid-19?
The government and the Bank of England (BoE) have been tackling the crisis through monetary and fiscal stimulus. Monetary policy refers to the management of interest rates carried out by the central bank, while fiscal policy is government spending and tax management. As part of its coronavirus support package, a raft of measures were introduced to boost the economy by encouraging people and companies to go out and spend money, instead of keeping it locked away. On the fiscal side, the government injected £30bn into the UK economy and announced many additional measures, including cuts to stamp duty and VAT, and funding job retention schemes. At the same time, the BoE cut interest rates to the lowest level in history, at just 0.1%
he coronavirus crisis has turned all previous economic predictions on their head. If last year, the biggest concern was rising interest rates, today interest rates are at their lowest level in history and the government is doing all it can to get the UK economy through the crisis. This means the outlook for inflation and interest rates has changed drastically from this time last year.
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What does this mean for inflation? Typically, the argument is that because fiscal stimulus is designed to bring money back into the economy it will eventually push up inflation. But until very recently inflation has continued to drop. In May, inflation was at its lowest level in nearly four years at just 0.5%. It is only recently that we saw a jump in inflation to 1%. This jump was unexpected, but both economists and investors believe inflation will be at rock bottom for some time in spite of all the money being pumped into the economy by the government. In part, this is a lesson learnt from the wake of the 2008 financial crisis. Back then, governments were also pumping cash into the ailing economy and cutting interest rates to help stimulate the economy. But consumer prices failed to soar.
There are a number of reasons for this. A big jump in unemployment, coupled with wage cuts or weak pay growth, has contributed to consumers deferring major purchases. This, combined with continued uncertainty about the economy and job prospects has also seen discretionary spend reduce overall. And whilst the government has made it cheaper for consumers to spend, on average they have far less money to be able to do so. According to Ian Stewart, chief economist at Deloitte, this means inflation remains “muted until the economy makes up the huge loss of activity sustained in the first half of this year”.
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so the number of new mortgages on offer has been declining and mortgage rates have been on the rise for first time buyers (according to Moneyfacts). Suter said: “Some banks and building societies tightened up their lending criteria or minimum deposit requirements, for fear of a drop in house prices, while at the same time some households will inevitably have felt their finances were too precarious to commit to a house move at the moment.”
(AJ Bell research)
of people have saved money in lockdown
70%
Government COVID-19 fiscal package
£30bn
(Moneyfacts)
Are interest rates on the rise?
etirees are needing an increasingly larger pension pot for a comfortable retirement in the UK, with long-term low interest rates making it harder for investors to save enough during their working lives, and increasing longevity placing individuals at risk of outliving their savings as well. Research from Royal London suggests the average pension pot needed by UK workers to retire comfortably has already increased by £110,000 since 2002, from £150,000 to £260,000 in 2018. Helen Morrissey, personal finance specialist at Royal London says: “If our retirement pot is going to support us through a longer retirement and in an era of lower interest rates, we are going to need to build a much bigger pot than in the past. “More worrying still, we can no longer assume that we will be mortgage-free homeowners in retirement. For those unable to get on the property ladder during their working life, an ongoing private rental bill needs to be factored in to retirement planning. For all of these reasons, we cannot afford to be complacent about current levels of retirement saving.” William Burrows, annuity and pension expert and a financial adviser at Better Retirement, says: “At retirement age (55 years old and over), a person should start thinking about the options to convert pension pots into cash and income, and ask themselves the following questions: What is a sustainable level of drawdown income (a way of getting pension income when you retire whilst your pension fund remains invested)? What is the best way to invest for drawdown and how to decide between cash, annuity or drawdown?” Personal circumstances An individual’s retirement strategy depends very much on their personal circumstance. Some considerations include: whether they have dependents, whether they need a care plan due to poor health, or whether they are considering retiring abroad. Burrows adds: “There’s another risk that personal circumstances will change, by which I mean family death. You’ve got to take your health into consideration; and you’ve got inflation risk. And there is the risk of a stock market crash. Suddenly your £100,000 is worth £70,000 or £80,000 and that’s quite painful for people.”
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William Burrows, annuity and pension expert and a financial adviser at Better Retirement, says: “At retirement age (55 years old and over), a person should start thinking about the options to convert pension pots into cash and income, and ask themselves the following questions: What is a sustainable level of drawdown income (a way of getting pension income when you retire whilst your pension fund remains invested)? What is the best way to invest for drawdown and how to decide between cash, annuity or drawdown?” Personal circumstances An individual’s retirement strategy depends very much on their personal circumstance. Some considerations include: whether they have dependents, whether they need a care plan due to poor health, or whether they are considering retiring abroad. Burrows adds: “There’s another risk that personal circumstances will change, by which I mean family death. You’ve got to take your health into consideration; and you’ve got inflation risk. And there is the risk of a stock market crash. Suddenly your £100,000 is worth £70,000 or £80,000 and that’s quite painful for people.”
etirees are needing an increasingly larger pension pot for a comfortable retirement in the UK, with long-term low interest rates making it harder for investors to save enough during their working lives, and increasing longevity placing individuals at risk of outliving their savings as well. Research from Royal London suggests the average pension pot needed by UK workers to retire comfortably has already increased by £110,000 since 2002, from £150,000 to £260,000 in 2018.
In relation to risk, what may seem an appropriate level of risk at age 55 may be very different from the appropriate risk at age 65 or 75, however. There are a number of ways of investing in order to reduce or eliminate the ‘sequence of returns risk’ (the risk that investment returns are lower-than-expected or negative in the early stages of a drawdown resulting in capital being eroded quicker than anticipated) such as paying income out of a cash fund and topping up the cash in good years. Investing in a fund that is designed to provide long-term growth with some risk, but ultimately aims to provide a ‘smoother’ return profile – one that should be less volatile than most funds – is another option investors could consider. Some providers even offer specific ‘smoothed return’ funds which hold back some profits in the good years so that when markets dip, they can be put back on.
According to a recent survey of Fidelity investors, this is an ongoing concern for investors at the moment. Stock market volatility this year as a result of the coronavirus has placed a renewed focus on individuals having the ‘right’ plans in place to ensure they are not left with a reduced pension pot. 61% of survey respondents due to retire within the next five years have seen the value of their retirement savings fall this year already. Burrows says many of these risks can be categorised and the question future retirees should be asking is: ‘What can you do to mitigate against these risks?’ “You could mitigate against equity risk by being well diversified. You could mitigate against inflation risk by investing in real assets. You could mitigate against changes in personal circumstances by having flexibility, and so forth. And that’s quite a nice logical way of pulling it all together.”
Helen Morrissey, personal finance specialist at Royal London says: “If our retirement pot is going to support us through a longer retirement and in an era of lower interest rates, we are going to need to build a much bigger pot than in the past. “More worrying still, we can no longer assume that we will be mortgage-free homeowners in retirement. For those unable to get on the property ladder during their working life, an ongoing private rental bill needs to be factored in to retirement planning. For all of these reasons, we cannot afford to be complacent about current levels of retirement saving.”
Invest too aggressively and the pension pot could reduce in value; too cautiously and the pension pot will have insufficient growth potential
Stock market volatility has placed a renewed focus on individuals having the ‘right’ plans to ensure their pension pot isn’t reduced
Those reaching retirement age are having to contend with ongoing market uncertainty, highlighting the need for an early, and flexible, approach to saving for a pension
Finding the right balance for a viable pension pot
With risk being managed effectively as part of a retirement investment strategy, it is also important to produce a sustainable income in retirement. There are two parts to achieving a sustainable income: sustainable in terms of not running out of money and sustainable in terms of maintaining spending power i.e. keeping up with inflation. Sustainable income should be reviewed regularly taking into account factors such as age, health and investment returns; income may be increased or decreased each year depending on circumstances. There are a number of options available to retirees and it is important to ensure they are aware of all of them. Options include delaying taking a pension until a later date, using pension drawdown to access a flexible income, buying a guaranteed annuity, or taking some or all of your pot on retiring. Each of these options, or a combination of them, requires careful consideration and analysis in order to ensure it is the right one for you and your income is maintained throughout the later years. For example, pension drawdown offers retirees flexibility to take out as much income as they need and whenever they choose. However, though it might be tempting for someone to dip into their pension pots when they reach 55, if this is done without good reason, they will probably not get the best outcome. For others that leave their pension invested, their pot can fluctuate according to what markets do. An annuity meanwhile offers retirees an income for the rest of your life (or a set period). However, when you buy an annuity, you effectively sell some or all of your pension pot to an insurance company, and you could end up locked into a poor rate if you do not choose your annuity product carefully. Overall, there is a lot to consider when looking for an income in retirement, and it is important to seek financial advice before doing this. This can help even in the early days of planning, as if you invest too aggressively when building your pension pot, it could reduce in value if equity prices fall. Invest too cautiously and the pension pot will have insufficient growth potential.
Running out of money
26%
Source: The Great Retirement Survey 2019; October 2019. The survey was conducted on behalf of interactive investor by Core Data, a global market research consultancy between February 2019 to June 2019. 9,966 respondents completed the survey.
What are the biggest pension concerns and priorities?
Rising cost of living
23%
Not being able to pay for quality long-term care
10%
Enjoyment
31%
Peace of mind
25%
Primary concerns ahead of retirement
Pension priorities
etirees will need an increasingly large pension pot in retirement, approximately £260,000, for the average UK worker, according to the latest research by insurer Royal London. Helen Morrissey, personal finance specialist at Royal London says: “If our retirement pot is going to support us through a longer retirement and in an era of lower interest rates, we are going to need to build a much bigger pot than in the past. “More worrying still, we can no longer assume that we will be mortgage-free homeowners in retirement. For those unable to get on the property ladder during their working life, a large private rental bill needs to be factored in to retirement planning. For all of these reasons, we cannot afford to be complacent about current levels of retirement saving.” Drawdown options William Burrows, annuity and pension expert says: “At retirement age (55 years old and over), a person should start thinking about the options to convert pension pots into cash and income, and ask themselves the following questions: What is a sustainable level of drawdown income? What is the best way to invest for drawdown and how to decide between cash, annuity or drawdown?” A person’s retirement strategy also depends very much on their personal circumstance: whether they have dependents – wife, children or grandchildren, whether they need a care plan due to poor health or whether they are considering retiring abroad.
Invest too aggressively and your pension pot could reduce in value if equity prices fall. But invest too cautiously and your pension will have insufficient growth potential. What is the right balance?
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So maintaining some sort of geographic diversification must be considered when investing, and it’s important to ensure that risk is spread across assets. For example, a holding in emerging markets may seem a good long-term performance but it could be accompanied by high levels of market volatility. In this sense ‘volatility’ is the up-and-down movement of the market and it is often perceived as a measure of risk. Conversely, an investment in the UK or the US may see lower long-term growth, but with a reduced volatility. Apart from geographical diversification, risk can also be spread by holding investments across a range of sectors, so companies in different industries can be subject to different performance drivers and economic cycles. For instance, technology companies will not have the same return profile as global mining companies, nor will banks or insurers perform in line with pharmaceutical and healthcare firms. Finally, it is even possible to diversify across different investing styles.
hen an investor chooses to diversify, they are investing in a number of asset classes that enables them to spread or reduce risk in the long term. For example, if something is happening in one market, and the portfolio is diversified, you might be impacted to some extent. However, there are many other asset classes that may not have the same market reaction, or may even have the opposite.
Finally, alternative asset classes – such as infrastructure, private equity and property (as an asset class) also have different dynamics. Property markets tend to move up and down in long cycles, whilst some alternative investments aim for positive returns in all market conditions over a specified time period. So including these asset classes could further improve a portfolio’s overall risk and return characteristics. When you look at what has happened over the first half of 2020 with regards to stock market volatility, and look forward to events in the coming months – elections across the globe, the UK finally exiting the European Union, and of course the long-term implications of the coronavirus crisis - it is easy to see why having a diversified portfolio makes sense to an investor.
Yet it is important to remember almost any asset class by itself can be impacted by volatility at any time. Sometimes this volatility may cause normal asset correlations to rise, rather than moving in different directions as they usually do. In addition, it is important to remember that although diversification aims to limit negative performance on a portfolio, because it looks to have a balance between higher risk and defensive assets (these are assets that can help protect portfolios in falling markets), in the short term performance might be limited. These concerns emphasise the need for a long-term and flexible approach to investment, particularly when planning for retirement.
Overall, diversifying your portfolio can help your investment strategy. By having a diversified portfolio you have the potential to create a scenario which means you can take less risk for the expected return. So the UK market may take a tumble but because you have plenty of exposure elsewhere you might be less affected. Therefore individual crises and events have a smaller impact. Diversification enables you to focus on the long-term future and not worry as much about such short-term issues. The next asset class is fixed income, which can be broken down further into government bonds and corporate bonds including investment grade bonds and high-yield bonds. There is also emerging market debt, both of the government and corporate kind. Generally, equities and bonds have a low correlation to each other. Correlation represents the degree of relationship between price movements of different asset classes in a portfolio. In theory, if a correlation between two assets is low, the diversification benefits are higher. The opposite is also true so if correlation is high, diversification is usually much lower. Therefore a blend of assets like equities and bonds is required to ensure that, if one is going down, the value of your portfolio could potentially be protected to some extent by the other.
Generally speaking, the standard asset classes are equities (shares), fixed income (bonds), property, alternatives and cash. Within the equity markets there are different geographic regions: the UK, Europe, the US, Asia and emerging markets. Emerging markets often have a different dynamic when compared to domestic or international equities. They are typically developing countries, where investments might enjoy higher returns, but are often accompanied by higher risks.
A multi-asset portfolio could help address the risk of volatile returns
A holding in emerging markets may see a good long-term performance but it could be accompanied by high volatility
It rarely makes sense to have all your investment ‘eggs in one basket’, especially considering the up and down movements of markets that investors have experienced in recent years. That is why the importance of diversification, and a long-term outlook, is so crucial to planning for retirement. Sheldon MacDonald, deputy chief investment officer at Architas, explains
Ultimately, a multi-asset portfolio could help address the risk of volatile returns. Having exposure to equities could help boost investor returns, bonds could provide stability in periods of equity market stress, while asset classes such as infrastructure could help protect your portfolio against rising inflation. Importantly, when you are getting close to retirement, one approach could be to invest in a multi-asset portfolio that has a strong focus on fixed income. Investing in bonds carries less risk (than equities) and still provides an income. Although, if an investor has all their money in bonds, the chances are they will struggle to grow their income above inflation. In addition to the benefits of diversifying across a broad range of markets, a professional fund manager will be making all the asset allocation decisions for you; so multi-asset is a relatively simple first step onto the investment ladder for younger investors.
hen an investor chooses to diversify, they are investing in a number of asset classes that enables them to spread or reduce risk in the long-term. By having this level of diversification within a portfolio, an investor can have ‘peace of mind.’ For example, if something is happening in one market, and the portfolio is diversified, you might be impacted to some extent, but there are many other asset classes that may not have the same market reaction. So generally speaking, the standard asset classes are equities, fixed income, property, alternatives and cash. Within the equity markets there are different geographic regions: the UK, Europe, the US, Asia and emerging markets. Emerging markets have a different dynamic when compared to domestic or international equities. They are typically a developing country, where investments are riskier but are often accompanied by higher returns. So maintaining some sort of geographic diversification must be considered when investing, and it’s important to ensure that risk is spread. Risk allocation For example, a holding in emerging markets may see a good long-term performance but it will be accompanied by high levels of market volatility. In this sense ‘volatility’ is the up-and-down movement of the market and it is often perceived as a measure of risk. Whereas an investment in the UK or the US may see lower long-term growth, but with a reduced fluctuation in prices. Risk can also be spread by holding investments across a range of sectors, so companies in different industries will be subject to different performance drivers and economic cycles. For instance, technology companies will not have the same return profile as global mining companies, nor will banks or insurers perform in line with pharmaceutical and healthcare firms.
By having a diversified portfolio you have the potential to create a scenario which means you can take less risk for the expected return
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Indeed, a multi-asset fund with a long-term outlook means it could offer a smoother investor journey to retirement. Risk-profiles can also help and are used to choose which style of fund – perhaps cautious or something higher risk – is most suitable for the investor. For example, if you are far away from retirement, a multi-asset portfolio with a mix of assets dominated by higher risk equity holdings that carry the potential for higher returns over the long term may be appropriate. For those closer to retirement, however, it may be more appropriate for a multi-asset portfolio to contain more government or corporate bonds that offer lower growth but are also lower risk, and therefore less likely to impact your pension pot if markets do fall. It is important to remember market dynamics are unpredictable, and as we have seen this year, volatility can impact investments in many different ways. A good multi-asset manager must look to put together a portfolio of asset classes that offer different but complimentary attributes, while fulfilling a specific risk and return profile.
arket volatility caused by the onset of the COVID-19 panic caused a number of riskier assets – predominantly equities (shares listed on a stock market) – to fall by as much as 30% in March 2020. According to research from Moneyfacts, the impact on pension funds was severe with as many as 89% of funds seeing losses in the first three months of 2020.
For the most part, these losses are likely to have been short term with markets having since rebounded. Yet the market events of this year have brought into focus the benefit of a flexible approach to retirement that is spread across a range of investments and markets. This is one of the key benefits of using multi-asset funds which can serve as a ‘one-stop shop’ for investors. Their appeal is easy to see: in order to meet a predetermined investment objective, multi-asset funds invest across a range of asset classes from traditional equities and bonds, to alternative assets such as infrastructure and property, and commodities such as gold, to name a few. The exact mix is often dependent on the fund's investment objective, but because they have such a broad remit, the flexibility of multi-asset funds is appealing during difficult market climates, such as the one we saw earlier this year.
Market dynamics are unpredictable and as we have seen this year, volatility can impact investments in many different ways
The rise in demand for multi-asset investing is largely driven by the need for a one-stop solution that aims to protect investments in falling markets and outperform as they rise, explains Architas product specialist Jon Arthur
The assets must be monitored on an ongoing basis to ensure they are doing what they should be, and delivering within the risk boundaries for the fund. They must also add diversification to a portfolio to try and mitigate against risks. It is these extra management tools that the investor should be getting for the charges they pay for a multi-asset fund.
Important information
All information correct as at 21 September 2020. We will not accept any legal responsibility for any advice provided in relation to this document. We provide and manage investments and do not assess the suitability of funds for individual investors. If any financial adviser, or network of advisers, is named on this document, it does not mean we have any knowledge of, or influence over, advice that you have received or will receive. Your financial adviser alone is responsible for any financial advice or recommendations provided in relation to your investment decisions. Past performance is not a guide to future performance. The value of investments and any income from them can go down as well as up and is not guaranteed, and you could get back less than you invest. AXA is a worldwide leader in financial protection and wealth management. Architas operates three legal entities in the UK; Architas Multi-Manager Limited (AMML), Architas Advisory Services Limited (AASL) and Architas Limited. Both AMML and AASL are owned by Architas Limited, which is 100% owned by AXA SA (a company registered in France). AMML is an investment company that provides access to other investment managers’ services through a range of multi-manager solutions, including regulated collective investment schemes. AMML is a company limited by shares and authorised and regulated by the Financial Conduct Authority (Firm Reference Number 477328). It is registered in England: No. 06458717. Registered Office: 5 Old Broad Street, London, EC2N 1AD. We recommend that you seek financial advice before making any investment decisions and do not enter into any investment transactions on the basis of this document alone.
