With the current uncertainty around the Trade Deal outcome, it’s quite possible that investment markets may see greater than usual volatility over the next few weeks. Whilst it may be that UK and European Equity valuations have already priced in a potential ‘no deal’ scenario, there remains the possibility that these investments could see near-term value reductions with no clear picture as to how long it might take for share prices to recover. A no deal trade outcome will have very little effect on most of the other international investments that you might be exposed to.
If you are about to retire, and have DC / AVC benefits included within your overall retirement benefits, here are some general principles to bear in mind:
1. Lifestyle Investment Profile (LIP) investors retiring at your Target Retirement Age
a. If you are invested in either the Cash LIP or Annuity LIP, and intend to take cash or buy a guaranteed income for life (also known as an annuity), then we wouldn’t expect any potential volatility to affect your retirement planning to any great degree. This is because, via the asset switching / volatility damping processes inherent within the LIPs, your current investments are well matched to the intended use of your DC / AVC account.
b. If you are invested in the Flexible LIP, the continued exposure (albeit at a reduced level) to Equities and Bonds means that your account value could see higher than usual volatility. Whilst establishing an income drawdown arrangement isn’t particularly affected, taking other options will have implications:
- If you are intending taking cash, then your account value may be lower than expected.
- If you are considering purchasing an annuity, then your current investments are not well matched to the intended use of them. As such, if significant volatility arises, the timing of the ‘one-off’ annuity purchase should be considered carefully as, once the transaction is completed, it cannot be undone and you would not be able to reap the benefits if / when share prices recover. In these circumstances it is strongly recommended that you seek Independent Financial Advice before implementing this type of transaction.
2. Lifestyle Investment Profile (LIP) investors retiring before your Target Retirement Age (TRA)
If you are retiring before your TRA, this means that the full benefits of the LIP’s asset switching / volatility damping mechanism won’t have been realised. If your retirement is only a few years before your TRA then the comments in 1 above would be expected to hold good. However, the closer you are to age 55, the more your investments could fluctuate and, therefore, the greater the impact on your account value should investment markets become more volatile than usual over the next few weeks. As such, we suggest that all LIP investors who are retiring before their TRA and who are considering taking cash or purchasing an annuity, should seek Independent Financial Advice to discuss transaction timing.
3. Self-select fund (SSF) investors
SSF investors will have selected one or more stand-alone investment funds geared to meet their particular retirement objectives. As a ‘hands on’ DC / AVC investor, we generally expect that members will be well informed regarding investment matters and will already be factoring in the impact of potential higher volatility upon their existing investments and how this might impact both retirement income options and timing. A no deal Brexit may have little or no effect on the specific investment funds that you have chosen to invest in. If you are not already being advised in these areas, we would suggest that Independent Financial Advice is sought if taking cash or purchasing an annuity is being considered.
4. Timing flexibility for AVC members in a Defined Benefit (DB) scheme
Just to remind members that you are not required to take your AVC account at the same time as your DB pension. In the context of the above comments, this flexibility may be helpful if you are considering taking cash or purchasing an annuity with your AVC account but would prefer not to do so during your forthcoming retirement. (NB: If you are considering using your AVC account to fund part / all of your Tax Free Cash (TFC) requirements, then it is important to note that TFC must be taken within 12 months of your selected retirement date. After this time, the TFC option would expire and the AVC account would need to be used to secure additional pension).
- If you decide that you would like to speak to an Independent Financial Adviser, the following sites may help: directory.moneyadviceservice.org.uk or unbiased.co.uk
- A Pension Wise guidance session to help you fully understand your options (these are available to anyone over the age of 50) may prove beneficial. To find out more about the Pension Wise service and details of how to book an appointment visit: pensionwise.gov.uk
- Remember the importance of being a ScamSmart investor. The Financial Conduct Authority provides advice on how to avoid investment and pension scams: fca.org.uk/scamsmart