Pension funds in danger of losing 22 per cent of value 12 months before retirement – recent volatility shows how millions can be caught out in run up to taking annuity
- Research based on a stochastic model produced by Professor Paul Sweeting, University of Kent
- Most people unaware of dangers of staying in equities
- ‘Set and Forget’ mentality potentially disastrous for those about to retire
IN THE WAKE OF RECENT STOCK MARKET VOLATILITY, specialist retirement advice company Annuity Direct today warns on how those closest to retirement are most in danger of losing substantial pension income – if they remain100 per cent invested in stock market based funds.
Recent research based on a stochastic model produced by Professor Paul Sweeting, University of Kent reveals the dangers of not examining where pension investments are held.
“This research is particularly apposite in the wake of the extensive stock market we have witnessed so far in August,” said CEO Bob Bullivant.
“Those who are close to retirement age run the biggest risk as there is too little time to make up any lost ground should markets collapse on them,” he added.
“As our table (below) illustrates, there is a significant danger that a typical pension fund could change substantially, depending on how equity and bond prices move around.
“We calculate that there is a 1 in 20 chance of losing over 22% – getting on for a quarter – of the value is a pension fund, simply by keeping the fund invested solely in shares during the year before retirement.”
“Experience tells us that the majority of people make their investment selection when starting a pension fund – and leave it untouched for 20 years and more – we call it “set & forget”.
“’Set & forget’ behaviour patterns unfortunately dominate most people’s attitudes to their pension plan – regardless of poor investment performance or excessive charges being levied,” added Bullivant.
Source: Stochastic model produced by Professor Paul Sweeting, University of Kent
“As so many people near retirement will testify, market volatility is potentially calamitous financially, as pension funds have collapsed in value and the cost of buying an annuity increased.
“For example, if you had your pension invested exclusively in shares and retired at the end of September 2007 then your pension would have been double the level it would have fallen to 18 months later, in March 2009.
“Our data shows that, of people coming to us one year away from retiring, 60% of investments are in equities, managed funds or with profit funds, and only 23% of funds invested in bonds which best match the annuity that they are about to purchase.
“With around £12bn of pension assets being used to buy an annuity each year, then there is likely to be a huge amount being unwittingly gambled each year by soon-to-be pensioners,” said Bullivant.
“A simple review of the pension plan and where it is invested in that crucial run up to converting the fund into an annuity to secure an income for life’s longest holiday is critical – otherwise a comfortable retirement could turn into one where pensioners have to watch every penny.
CEO, Annuity Direct
01983 817641 / 07901 556879
Senior Consultant – Director, DAM PR
07941 255855 / 01273 711567
Annuity Direct is one of the UK’s best known retirement income specialists. Established in 1991 to help consumers maximise their pension income, the company has pioneered the provision of education and advice about the open market option that allows people to shop around for the best possible deal on their retirement income.
As Chartered Financial Planners, Annuity Direct is committed to the highest possible standards of service and ethics.
The company is based in Newport on the Isle of Wight.