850,000 pension savers could be sleepwalking into a bond market nightmare

Those who plan to invest their pension for income might consider gradually switching their pension pot into income-producing funds, such as Multi-Asset Income funds, and Equity Income funds, which then provide the requisite amount of income needed in retirement.

Those who plan to go for growth with their pension and take capital gains might consider holding growth funds in their portfolio and simply carrying on with this investment strategy to, and through, their retirement date. This is a riskier approach and likely to be favoured by those who have high levels of pension saving, perhaps in the form of a defined benefit scheme, or assets like property, or simply a large defined contribution pension, or some combination of all of these.

In the three cases above, investors might also consider gradually building up to a cash pot of 25% of the value of their pension, if they intend to withdraw all of their tax-free lump sum at retirement.

Those who plan to take their pension as cash might consider gradually selling out of the market and switching into cash as they approach retirement, so as to avoid any falls in the value of their pot just as they are about to draw on it. This does open them up to inflation risk, but that really stems from the decision to encash the pension, rather than continue investing it for the long term, which could provide some measure of inflation protection.

The FCA’s default fund plans

Pension investors may follow one of these routes, or a combination, and so need to tailor their pre-retirement investment strategy based on their own individual plans. A single default investment strategy, selected by a pension provider for all its members, can’t hope to adequately cover the range of possible options now available to retiring pension investors. It’s therefore interesting that the FCA is currently consulting on introducing a standardised ‘default’ option for individual pension plans, and as part of that, mandating some form of ‘lifestyling’ or ‘de-risking’ as investors approach retirement.

The investment solutions provided by the industry in response would likely be a better fit for today’s retirement market than annuity hedging funds. But what annuity hedging funds demonstrate is the danger of setting an automatic investment strategy that takes place many years in the future, by which time it may be obsolete. Today’s best pre-retirement strategies may well look out-dated in twenty years, and if pension providers have to automatically shift investors into them nonetheless, that could just be storing up problems for the future. There simply isn’t a one-size fits all default solution that can compare to engaged investors making well-informed decisions based on their own circumstances, or seeking professional advice to do so.