With-profits products can be a useful tool for investors looking to grow their retirement pot without too much risk says Frank Morton
When it comes to retirement planning, no two clients are the same, yet they all desire a similar outcome - to maximise their income in retirement. How they then decide to do that is down to their individual circumstances, their attitude to risk and their preference for the type of investment they choose to underpin their pensions savings. Advisers have myriad considerations to take into account, not least choosing the most appropriate investment to produce the biggest savings pot possible. Questions arise from investors on an array of subjects. These include the need to think about how and where they will invest their pension savings, what kind of products are available and are they suitable? Will what an investor chooses today determine their future income for the rest of their life? What choices are open to them?
When we paint a profile of the average person saving for retirement, we see that as well as answers to the above questions, they all want an investment that has the potential to grow steadily over time, that isn't racy to the extent that they might lose everything and that isn't fully exposed to a single asset class. Diversification is important. Typically, we've found that they describe themselves as cautious when it comes to investing. What this really means is that they want to minimise risk which tends to be referred to in a negative sense because of a lack of understanding and a fear of the unknown. Improve the level of understanding of the risk and then you are into risk management which feels like a much better place to be. Having worked in this area for many years, people approaching retirement while likely to want to make a tidy bundle, do not want to risk their life savings either. By being so close to retirement their investment horizon shortens and therefore they are wise to invest in a way that allows for greater risk management.
One such investment option that is now definitely back in vogue, especially in light of volatile market conditions, is with-profits. With-profits is essentially a cautious investment vehicle, the main objectives of which are to provide solid returns with the aim of beating cash. It is generally seen as a safer haven for investors' money and none more so than in particularly volatile market conditions such as those we are experiencing just now. This, in the case of Prudential, is achieved by not only investing across different types of assets such as equities, bonds and property, cash and alternatives, but by the manner in which the fund is managed through a focus on asset allocation and an unconstrained investment philosophy to seek out value in distressed and undervalued markets.
Investors preparing for retirement look to accumulate money in a variety of ways and with-profits is one option they can consider at this stage of the retirement income journey.
With-profits is an attractive proposition for investors nearing retirement as the products offer a comfortable level of risk. With-profits funds for investors up to age 75 offer a guaranteed investment of at least as much as a person pays in, they get to keep any bonuses that are added to the plan and income can also be taken as either a one-off or monthly payment.
However, the accumulation phase of retirement planning only represents one half of the story.
At retirement, clients' attitudes to risk tend not to change suddenly. Having worked hard to build an investment pot and in doing so protect it from the vagaries of the market, it's equally important to continue to manage risk in the decumulation phase.
With-profits 'in retirement'
With-profits also has an application for investors in retirement. If deciding what form your pension saving should take in 'pre-retirement' was difficult, then the options available 'in retirement' don't get any easier. Post A-Day income drawdown is competing head-to-head with annuities whether conventional, impaired, variable or with-profits. Importantly, the choices made effectively decide the income that the client gets for the rest of their life.
With the greatest threat to retirement income coming from inflation, with-profits is increasingly being considered by advisers. Crucially, with-profits annuities (WPAs) generate an income stream that has the potential to grow and provide a natural hedge against inflation. By contrast, a fixed-level annuity will not rise, so a retiree will find that the value of their annuity is gradually reduced by inflation. WPAs can also provide an attractive alternative to conventional annuities that are linked to inflation. Although incomes from inflation-linked annuities are guaranteed to rise in line with the Retail Price Index, the starting incomes are usually considerably lower and will take several years before they provide the same level of income as provided by a conventional annuity.
Retirement is a key concern for everyone today, particularly with an ageing population such as the UK. Products like with-profits represent a good investment opportunity as a vehicle which allows a bit of risk with exposure to the stock market. It is a good investment option at any stage of the retirement journey - and with today's current uncertainty it can make real sense to opt for this fairly cautious approach.
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