Fidelity has launched a new range of ‘lifetime funds' for people planning for retirement which use a ‘target date' approach instead of ‘lifestyling'.
The new range is a series of open-ended mutual funds which start off around 35 years from a retirement date and then every five years the asset allocation of the fund changes in line with the age of the investor.
Fidelity says the new range is an attempt to shake up the retirement savings market as the funds allow people to build up an investment portfolio through a series of six funds before moving into the retirement income fund which provides an income but still retains some investment in equities.
It argues this approach means a retiring saver has the ‘optimum balance of investments’ to generate an income which aims to keep pace with inflation over a retirement which could last decades following continual increases in longevity.
Richard Wastcoat, UK managing director at Fidelity International, says the needs of people planning for retirement are changing radically, so people really do need to plan for a retirement which could last for 30 years.
As a result Fidelity says the retirement income fund will be made up of around 30% exposure to risk – shares, property securities and commodities and 70% fixed income to insulate the investor from inflation during retirement.
Peter Hicks, head of IFA channel at Fidelity, says the funds act as a kind of flight-path to retirement, with each dated fund following the same pattern of gradually reducing the weighting in equities and other assets in favour of more fixed income investments.
Once the target date is reached the fund merges into the retirement income fund where investors are not required to buy an annuity and can drawdown a fixed monthly amount of their choice through an ‘accumulating share class’, although in October Fidelity says it will be launching a ‘distribution share class’ which will deliver an initial payout of 4%.
Hicks says: “This is taking the traditional solutions offered by life companies to another level. It is based on existing funds in the US, with around $100bn held in this type of fund, so it’s not a ‘flavour of the month’”.
And going forward Hicks says he envisages mutual funds taking the ‘lion’s share’ of new money going into investment and retirement savings.
Wastcoat adds: “Improvements in life expectancy mean people will need to manage their investments for the long run, to draw down their savings at a sensible rate and to take action to insulate themselves from the effects of inflations. This is what the fidelity retirement funds seek to do.”
The launch of Fidelity’s new range of funds follows a report form the Pensions Institute at Cass Business School which suggested default funds for pension schemes need to be designed more carefully, and also recommended the new personal accounts system should use a ‘target date’ approach instead of ‘lifestyling’.
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