The new pension freedoms will mean big changes to how savers behave as they reach retirement age over the next few years, says Mark Fawcett, chief investment officer at NEST
Historically, many default fund investment strategies operated with the assumption that retirees would take 25 per cent tax-free cash as soon as they retired and buy an annuity with the rest.
This course of action is, of course, no longer a given. Some commentators have argued that once apparently ‘safe’ default strategies of investing in pre-retirement funds designed to track the price of annuities start to look risky when retirees don’t plan to buy an annuity.
So schemes may need to look again at their approaches to de-risking. The de-risking period might be around ten years out from the saver’s State Pension age, as it is for the Consolidation phase of NEST’s 47 single year target date funds.
What do people say they want and expect in this final phase? NEST’s Future of Retirement consultation shows that when consumers are taking their money out of a pension scheme, they have similar priorities as when they are saving in one.
NEST’s existing research on members’ reactions to loss revealed consumers are naturally conservative when it comes to saving for retirement. People want protection against losses and volatility along the way and have a strong desire for a predictable outcome at the end.
It is perhaps not surprising to find a preference for some level of certainty and security in evidence when it comes to savers accessing their retirement pots. The new freedoms don’t appear to have changed this apparent aversion to risk.
NEST has responded to some of the challenges posed by the ’freedom and choice’ reforms by reviewing the glidepath for NEST Retirement Date funds. We’ve made changes so a member’s portfolio at retirement is more suitable for the way we expect them to access their pots in the new regime.
Funds maturing after 2020 will aim to outperform CPI after all charges, while progressively dampening volatility. This is because we’re still unclear what savers will want to do with these likely larger pots, but we think taking the whole pot as cash or converting it all into an annuity seems unlikely.
We’ve thought carefully about our portfolios. Our CPI plus portfolio at retirement has characteristics that mean while it’s aimed at people who are likely to invest through retirement, it’s still a reasonable portfolio for people who then change their mind and decide to take cash or annuitise.
While we’ve updated our glidepath into retirement to reflect this new reality, it’s still early days. We’ll keep this strategy under review as the reforms bed in and it becomes clearer what members are likely to do with their pension pots.
Mark Fawcett is chief investment officer at NEST