Retirement income: How much will you have in later life?Posted by Peter McGahan
Planning for retirement used to be a reasonably tame affair but with interest rates plummeting, annuity rates nose diving, and stock markets as volatile as they have ever been, it has never been more complicated to calculate what you might expect in retirement.
Over the past 10 years, stock markets have been relatively flat and investors have had to use much more investment expertise to achieve their objectives at retirement date.
Long gone are the days of buying a pension pot and letting an insurance company dwindle it away with excessive charges and poor performance. Investors should be actively managing their pension fund whilst at the same time accessing the most cost effective contracts.
It is worth noting for most, that insurance company 'managed' funds are indeed not managed.
This is very evident in their performance where none, yes none, consistently outperform a basic stock market index. They say their role is to maximise return and minimise loss, but in practise I have yet to see any evidence of that actually happening. Instead most have a buy and hold approach where they simply select a range of key stock at the outset and hold for long periods of time.
Most large pension funds are too big to actively manage their funds in any event, as they hold too much in each individual stock and that makes it very difficult to turn over.
Their asset allocation skills are also evident in their performance. Asset allocation is where the manager decides on whether to hold property, cash, fixed interests - such as gilts and corporate bonds, or overseas equities for example.
If you look at how much the asset allocation changes in a fund you will see it moves very little, showing the lack of active management.
In my experience over the years, it seems these funds simply want to outperform their average fund in their sector, rather than add the very best value to their investors, and in practise the strategic decisions around moving in and out of the relevant assets above, are tardy and reactive at best.
Investors would be well advised to see if their fund is being managed in the above manner and consider the use of an actively managed fund or the use of a Sipp to access the very best funds.
In doing so they might also consider the charges on their existing pension pot. Older style pension funds have lots of hidden charges such as mirror funds, monthly expenses and annual charges which can easily topple 10% per year. Many investors have been caught with this as they bury their pension pot in the background, hoping that the integrity of the organisation is sufficient to trust, but instead watch as the underperformance, coupled with excessive charges batters their future income.
A mirror fund is a classic example of this where you think you are buying a market leading fund, but instead you are buying an insurance company’s version of it. An example I saw recently showed that a Fidelity special situations fund bought directly, outperformed an insurance company’s version by as much as 12% per year over a three year period.
And if all this wasn’t enough, investors who reach retirement now find annuity rates at rock bottom. It is a toxic concoction of a flat market with inflation corroding the pension pot by 3% per year, charges scraping away at as much as 2-10% per year on older style contracts, and annuity rates floored, meaning that investors could be looking at a pension retirement of as much as 50% less than that secured in the past.
With the need to purchase an annuity diminishing, retirees should look at their pension fund and seek advice from a fee based independent financial adviser who can assess the performance of the fund, its charges, whether or not it is a mirror fund, and then discuss the point at which they believe annuity rates may begin to rise to a more attractive level.
The compounding effect of each of these measures will be significant on an income that will, in most cases, be the significant contribution to a sustainable income in retirement.
Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
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