The financial watchdog has sounded the alarm over savers using the pension freedoms to move retirement money to ordinary bank accounts, or into drawdown plans without getting investment advice. So what’s the alternative?
We have asked Darius McDermott, director of investment research house FundCalibre, to take a look at where you can invest for a better return.
Here’s what he said.
Retirement funds: Financial watchdog has sounded the alarm over how savers are using pension freedoms
When thinking about some fund options for drawdown, I think it’s important to remember that this part of your pension can be used in different ways.
You can do what it says on the tin and ‘draw down’ an income.
Or, particularly if you happen to have accumulated a decent sized pension and/or additional retirement savings, you could just leave it to grow.
If you don’t touch the drawdown portion it can also be passed on to your beneficiaries and will normally be free from inheritance tax if you die.
These things are all worth bearing in mind when you are deciding on your underlying investments.
Here are five different fund options which may or may not be suitable for these different drawdown pot uses.
They range in risk profile as, for example, a 60-year-old who could potentially have 20 to 30 years in retirement may consider taking more risk for potentially more growth, whereas a 75-year old may choose a more cautious approach.
F&C MM Navigator Distribution
Yield: 4.40 per cent
Ongoing charges: 1.64 per cent
This multi-manager, multi-asset fund is run by Rob Burdett and Gary Potter. They have worked together for more than 20 years.
Meeting managers is central to their process, and they have developed a unique skill over the years in finding specialist funds from boutique managers with a focus on sustainable high yield.
It is fund selection, rather than asset allocation, that has delivered the majority of this fund’s returns.
As the fund hold invests in around 30 other funds, the team use diversification as a key tool in reducing risk and they don’t take extreme bets.
If you don’t touch the drawdown portion it can also be passed on to your beneficiaries
Rathbone Strategic Growth Portfolio
Yield: 1.41 per cent
Ongoing charges: 0.5 per cent
This is a slightly different type of multi-asset fund in that it targets risk first and then looks to maximise returns.
The manager and his team try to select what ‘best of breed’ funds or passives to express their views and they aim to achieve a long-term total return of between 3 per cent and 5 per cent above the consumer price index of inflation over a minimum five year period, and a targeted risk budget of two thirds of the volatility of global equities as measured by the MSCI World Equity index.
They invest in all sorts of asset classes and will do so via funds, investment trusts and by investing directly in equities and bonds.
Jupiter Merlin Growth
Yield: 0.4 per cent
Ongoing charges: 1.67 per cent
This is a high conviction, multi-manager fund of funds run by one of the most respected teams in London.
The majority of the portfolio is often held in the top five fund holdings, although underlying stocks remain plentiful and diversified.
John Chatfeild-Roberts heads up the team and his philosophy is that people are what makes the difference in fund management. In the final analysis, there is no substitute for seeing the whites of someone’s eyes.
The team’s process is simple: they assess the macroeconomic environment, identify the best people, construct the portfolio, then monitor and modify. They have a bias towards fund managers who are resilient in tough times.
JO Hambro CM UK Dynamic
Yield: 3.42 per cent
Ongoing charges: 0.74 per cent (plus performance fee – see below)
Want to know more?
JO Hambro Capital Management UK Dynamic is profiled in more detail here.
Potential investors should note that it applies a fee of 15 per cent on outperformance of the FTSE All-Share Index.
A guide to performance fees and whether it’s worth paying them is here.
This fund was designed, and has been managed since launch in 2008, by the fund manager Alex Savvides.
Although small, the fund is rapidly gaining a reputation as a strong performer across a variety of market conditions. Unusually for a UK All Companies fund, it also provides a reasonable level of income.
Alex invests in UK companies that are undergoing substantial positive change that is unrecognised in the current share price. He thereby seeks to potentially benefit from a recovery in the business.
Each holding in the portfolio must pay a dividend. Alex is a relatively young manager, but has shown himself to be a very talented and determined investor. The current yield of 3.4 per cent is an attractive ‘added extra’.
Schroder Asian Income
Yield: 3.40 per cent
Ongoing charges: 0.94 per cent
This fund is more for a long-term drawdown pot or part of a wider portfolio. It gives investors access to the higher growth Asian economies, excluding Japan but including Australia and New Zealand.
As the fund invests in the Asia region, which consists of many developing markets, it is likely to be more risky than an investment in a developed market equity fund, such as the UK.
However, the manager’s preference for income-paying stocks means the fund is likely to be less volatile than some other Asian-focused funds.
The investment process is well thought out and has been implemented with diligence and skill. The manager’s experience, combined with the strength and depth of Schroders’ analyst team, make this fund stand out.
What happens if a market crisis hits your drawdown fund?
Pension experts warn that when there is a market meltdown, people who drawing down an income in the initial stages of retirement will crystallise their losses and pile up problems for the future, writes This is Money.
Taking an income from shrinking investments early on can do disproportionate and irrecoverable damage to your portfolio, because it is much harder to rebuild it to a position of strength.
Some retirees will be able to pause withdrawals, cut their spending, or rely on alternative assets until markets calm down, but others will need to take money from their drawdown plan regardless of the impact.
We explain what your options are if you find yourself in this situation here.
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