Investing in shares (equities) is a long-term game and requires an acceptance that the value of your investment can go down in value, sometimes by quite a lot, as well as up. When falls occur, they are often fast and unexpected.
To cope with market falls, you need to have plans in place before they happen. This short guide will help investors in their late 40s or early 50s to prepare their portfolios in advance of future market turmoil.
Investors in their late 40s and early 50s are likely to be putting money into a workplace pension scheme but may have started to reduce the risk/volatility of their investments.
In fact, if you are in your pension scheme’s default investment option – in other words, have not made your own investment choices – the trustees or managers of your scheme may have put in place an automatic mechanism to gradually reduce risk. Many schemes use ‘lifestyling’ investment strategies, which rebalance investments from a broad mix of assets towards bonds and cash as retirement approaches.
Moving your investments to bonds and cash is fine if you intend to buy an annuity with them. Before the introduction of new retirement choices in April 2015, many people tended to accept that the normal situation was to take a tax-free lump sum, and then use the remainder of their pension pot to buy an annuity.
Pensions freedoms mean that people can now keep their money invested and draw income directly from their accumulated pot.
If you intend to draw income straight from your pension pot at some point in the future, staying invested in a broad mix of assets is something you may wish to consider, rather than automatically accepting a default that moves your savings into bonds and cash.
People who have a defined benefit pension – for example a ‘final salary’ or ‘average salary’ pension – don’t need to worry about stock market movements. The pension scheme trustees and your current or ex-employer are responsible for making sure you receive the promised amount. Even if your employer or ex-employer goes out of business, there is an insurance scheme called the Pension Protection Fund. This will pay your pension up to a cap of around £30,000 a year.
In addition to your pension, you may also have other forms of investment such as individual savings accounts (ISAs) or shares. You may also have investments and life policies invested in ‘with profits’ funds.
Things you might want to consider
- You may wish to review your pension investments and decide whether your current fund(s) choices still suit your retirement plans. Think carefully about when you want any de-risking plans to commence – that is, automatically switching between investment funds as you approach your chosen retirement date. If you’re already in the process of de-risking but decide the time isn’t right, you may be able to put this action on hold by switching to another fund that mirrors your current asset mix but doesn’t have automatic de-risking.
- If your current fund choices have a high proportion of shares and the stock market hasn’t been performing well, you may want to defer any de-risking plans until the share part of your pension portfolio recovers. Again, if you’re already in the process of automatically de-risking, you may be able to put that process on hold.
- If you have with profits life policies such as endowments, or if your pension is invested in a with-profits fund, there may be no need to take any immediate action when the stock market falls, as these smooth out the ups and downs of investment returns. Some with-profits funds also provide a guarantee that your investments won’t fall in value, or that they will go up by at least X% a year. These guarantees are valuable and we would recommend taking regulated financial advice before cashing them in or switching to other investments.
- Your ISA holdings may be targeting shorter-term needs such as paying for a child’s university fees or a wedding. Given the fact that there may not be time for investments to recover their value over the shorter term, some people choose to hold investments in low risk assets such as cash deposits. For longer-term goals, a broader mix of investments could generate a better rate of return. Investments held in shares are usually regarded as long term and therefore have the potential to ride out some volatility in the market.
- Work out whether your investments are still on track to provide you with the income you will need in retirement, and to pay for any other known needs. There are tools and calculators available that will help you do this. If you are coming up short of your goals, you could consider paying more in.
For more information visit the I’m saving for my future page of our website.
If you want personalised advice, you should speak to a financial adviser. You can find a financial adviser in your area at www.unbiased.co.uk