Managing Your Pension Portfolio

 
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Fund and Portfolio Management - Why it is important for Drawdown customers

We make the fund management process simple, easy and hassle free for our customers. We ensure your money is managed how you want. For those who want a greater understanding of investment funds, and to see what goes on in the background, read on….  

People should understand that if they go into drawdown then the money they take as income or lump sums comes directly out of their fund. So a customer with a fund of £50,000 who takes £5,000 a year (10% of the fund value) from the fund, will have nothing left in their fund after 10 years – in fact the fund would run out before then, as product costs and charges would also reduce the value of the fund.

It therefore makes good sense to try to grow the value of the fund all the while you are in drawdown. The money is yours after all! It can be possible to take a suitable income and achieve sufficient growth to more than replace the income you have taken. This cannot be guaranteed, but we have seen it happen.

Even if you can’t replace all the income you take, if you can achieve some growth then you can nevertheless extend the time it takes to exhaust your fund. In the £50,000 example above, you would need to achieve at least 10% growth each year to continually sustain the income. In the current economic climate that is quite a big ask, however if you were able to achieve half of that amount - 5% per annum after costs – then your income would last for just over 14 years.

This means that customers need to find somewhere to invest their fund in a way that isn’t too risky, or is not risky enough, for the particular customer.

As an example the customer could invest all of their funds in the shares of a bank that they like. However this presents further problems :

  1. Every month to pay their income they will need to sell enough shares to replace the income.

  2. Depending on the demand for the shares, they could have trouble selling them, and therefore there could be delays before the income was received.

  3. There would be lots of additional administration associated with managing the shares – including dealings with the Tax Man.

  4. If the bank the customer invested in was ‘Northern Rock’ they wouldn’t have a pension fund (and therefore an income) anymore – as the value of the shares was completely wiped out.

  5. If the customer had bought shares in several companies, then they may not have lost their whole fund, but their time and costs in managing their own share portfolio has significantly increased.

Quite simply, most customers (particularly those in retirement) either don’t have the time, or don’t want the hassle or responsibility of doing this for themselves.

Therefore all pension providers have a range of funds that their customers can use, where all of the administration and management is done for the customer, and many of the risks and problems are reduced.

What is an investment fund / investment portfolio

Investment funds are set up by all kinds of institutions – insurance companies, banks, and specialist investment companies. They give customers access to all kinds of investments including a far wider range of investments than most people would normally be able to afford if they were investing direct. All of the administration (buying and selling, tax settlements, etc) is done by the Fund Manager.

A customer buys shares in the investment fund, rather than individually with all the investments contained in the fund. This means that the customer’s money is pooled with everybody else’s money, which again has benefits for the customer and the fund.   The main benefits of investment funds are  :


Diversification

As investments funds are worth millions of pounds, they invest in a wide range or investments. These range from Cash and deposits, Government (gilts) and Corporate bonds, Property and Equities (usually referred to as stocks and shares). Furthermore, depending on the particular investment fund, these investments could be in the UK or overseas. The collective term for these investments is ‘Assets’.

Therefore even a customer with only a few thousand pounds in an investment fund, could be indirectly investing in a large commercial property development in London, several long term UK Government bonds, share holdings in several multi-national companies and possibly even a gold mine in South Africa !!

All of these assets form the investment manager’s portfolio which he manages in line with the objectives on the investment fund.


Liquidity

All investment funds will hold a large amount in cash. This means that when it is time to pay you, this can be done immediately. You do not have to wait for various investments to be sold before you are paid.


Reduced Risk

Each investment fund is given a risk rating. Some are very cautious funds, others are very aggressive. Nevertheless they will all follow the diversification principle above – it is highly unlikely that any fund manager would invest more than 5% of the total value of the fund in any one single asset. This means that even if one of the companies that the fund manager had invested in goes the same way as Northern Rock, the fund has only lost a few percentage points.

Customers buy and hold ‘units’ in their investment fund(s). These units are given a value based on the total value of all the assets held in the investment fund. This means that like stocks and shares the value of the units can fall as well as rise.

Given that investment funds will invest in different areas and markets, and that they will have different risk levels, pension fund providers tend to have lots of funds available to customers. This gives customers the opportunity of selecting a fund that is best aligned to the customer’s own thoughts and attitude to investment.

Customers can choose more than one fund.

For those customers who do not want to pick their own funds, we used a range of funds known as ‘Governed Portfolios’ which match the customer’s own attitude to risk.

The Portfolios are numbered 1 – 9 ; 1 being the lowest risk and 9 being the highest. They follow the principle that the more risk that is taken by the Fund Manager, the higher the potential return, but equally there is a higher risk of your fund value falling.  

Going back to our income example at the very start, we would suggest that a customer who needs a 10% return to sustain income is going to be unlikely to achieve that return if they are a ‘very cautious’ investor. This equally doesn’t mean that they are going to achieve the return if they invest in a ‘very adventurous’ fund. The ‘very adventurous’ fund is set up in a way that means it has a better chance of achieving above average annual returns than the ‘very cautious’ fund – but at the end of any year, it is more than possible for the ‘very cautious’ fund to have had a better performance than the ‘very adventurous’ fund.

By asking the customer a few simple questions, we can identify how much risk a customer is willing to take. As an example, their answers may indicate that they are a ‘cautious’ investor. We can match the customer to a ‘cautious’ portfolio fund. The mix of the assets in that fund will always remain ‘cautious’. Even if the fund is growing, if some of the assets in the fund creep into a higher than cautious risk rating, then those assets must be sold, and assets matching the customer’s cautious risk profile are purchased instead. This means that we can give customers peace of mind that their investments are never too risky or too cautious, but are invested exactly how they would like.

Our customers all receive an annual fund review, but they can also ask for further reviews at any time during the year and can alter their investment options whenever they want.

More details on how we specifically help customers with their fund management can be found in the free information pack which is given to every customer who requests an income drawdown quote.

This is a brief introduction to investment fund and portfolio management. If you have any questions about how your pension fund is managed, please feel free to contact us. The value of your pension fund can fall as well as rise. If you deplete the value of your fund too quickly you could run out of money in retirement. Obtaining sufficient growth on your pension fund to replace the income taken from it as well as growing the fund is an ideal concept, it is not however a key feature of income drawdown and cannot be guaranteed.


 
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