If you are a DC member, have a Retirement Account as you are a member of Level 100+, or a Defined Benefit (final salary) member who pays Additional Voluntary Contributions (AVCs are a type of DC benefit), then the risk of stock market performance in relation to those DC benefits rests with you as you have choice as to which fund your DC, Retirement Account or AVCs are invested in.
The points which follow are designed as a prompt to members to review decisions which are about to be taken or which may have already been taken but not yet implemented. It is important to remember that neither Equiniti, Capita, the Trustee nor the Company are able to provide advice to members and what follows should not be construed as such. The aim is to highlight various issues stemming from recent investment market volatility in order that you can decide whether to seek financial advice around near term retirement decisions. With significant market volatility and taking into account the value of your pension pot, the appointment of a regulated financial adviser to review any retirement decisions could prove highly beneficial.
Issues for consideration
The recent market volatility can impact ‘at retirement’ decision-making in different ways depending on your starting position. The following prompts are provided to give some broad examples which will hopefully cover most retirees’ situations. By way of a reminder, your pension pot will be invested in one of two fundamental ways:
- If you took a ‘hands off’ approach as you did not wish to select individual investment funds, your pension pot will be invested in one of three Lifestyle Investment Profiles (LIPs), where accruing funds and future contributions transition between asset classes over time in line with the LIP’s investment objectives. This asset transitioning is geared to a member’s Target Retirement Age (TRA) which is age 65, unless you selected an alternative TRA.
- If you took a more ‘hands on’ investment approach, you may have decided to choose one or more self-select funds to invest in.
For those members whose pension pots are invested with Standard Life please log into your
to find out further details on your LIP or investment funds and your TRA. online account
Lifestyle Investment Profile (LIP) investors
• Flexible LIP
This LIP is designed for members who expect to use Income Drawdown (ID) either in whole or as part of their retirement income, rather than purchasing an annuity (pension) or taking their entire pension pot as a single cash sum. This means that, whilst the holding of growth assets is reduced over time, these assets will still account for c 50% of the total fund value at your TRA. Growth assets anticipate higher returns and therefore have a higher risk rating.
If you continue with a decision to implement an ID plan with a pension provider, then, it can be anticipated that as long as you broadly mirror the Flexible LIP’s asset distribution profile under the new ID arrangement, any recent drop in fund value will not necessarily have crystallised. Whilst you would be selling assets at a depressed price, you would be buying into mirror assets at similarly depressed prices under the new ID arrangement.
Over time, markets might regain some of the recent losses and so it is possible that your retirement strategy and expected income stream might not be affected too severely. However, if, over the term of the ID plan, current losses were not recouped, then the expected income stream would be lower and / or might be exhausted earlier than planned. It is usually recommended that ID plans are implemented with financial advice and so the adviser would be able to help regarding an appropriate future drawdown level / investment strategy.
If, however, you decided not to go down the ID route and instead planned to crystallise the fund value now (using a combination of annuity and cash payments), then the impact of market volatility and any recent market falls would effectively be ‘locked in’ with no opportunity for any improving market conditions to help increase your fund value. As such, it is strongly recommended that you consider this route carefully and seek Independent Financial Advice before implementing this type of transaction.
• Cash LIP and Annuity LIP
If you are currently invested in one of these two LIPs, then (as long as you are taking retirement benefits at your TRA - more on this below), you will have been sheltered from the severest falls in fund values given that you will have no equity-related investments at the point of retirement.
• Taking benefits invested in LIPs before your TRA
The statements above hold good where benefits are being taken at your TRA. Whilst your TRA will have initially been set to a default, typically age 65, you can change your TRA at any time. You should keep your TRA under review as it is important to consider whether your chosen TRA is right for you and your retirement plans.
If you are looking to access your pension pot significantly before your TRA, and particularly if you wish to buy an annuity, then it is recommended that you seek Independent Financial Advice before proceeding. This is because the LIP asset transitioning / reduction in volatility protection, is geared towards each member’s TRA. If you wish to take your benefits significantly earlier than your TRA, your pension pot is likely to still be heavily invested in equities meaning that you may not have received any significant level of protection against the recent market falls. As such, certain retirement income options available to you would see the current fund loss locked in with no opportunity for these losses to be recovered.
Self-select fund investors
If you took a ‘hands on’ investment approach and selected individual funds, the impact on your fund value will be governed by the extent to which equities (or growth funds) form part of your pension pot. In certain situations, the size of fund reduction might trigger a review of any retirement decision and also whether you may need to delay or postpone your retirement. For some members who retain an appetite for a reasonable level of risk close to retirement, the continuation of monthly contributions into equity-related funds may be attractive, given that assets can currently be purchased at much lower prices than those pre-March 2020. As always, members selecting individual funds are recommended to seek Independent Financial Advice and the current market conditions and volatility underscore this guidance.
- 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
- The Trustee of the BAE Systems Pension Scheme has arranged for Scheme members to have access to the Retirement Service provided by Hargreaves Lansdown. Details can be found at: retirementservice.co.uk/baesystems