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Pensions could be devalued by up to 20%


The way your pension assets are allocated could potentially reduce the potential value of your private pension by up to 20%. A large number of people who are currently earning and saving for their retirement already have inadequate savings and any threat to their retirement income should be treated with the utmost concern.


Regulations were introduced about a decade ago to reduce the risks faced in company or money purchase pension schemes. These 'safety first' regulations were implemented following the last stock market crash and were approved by the Financial Services Authority. Lifestyle structured pension funding was adopted at this time, and works by switching your pension funds from shares into bonds and deposits as you begin to approach your retirement age.


These lifestyle funds are designed to help you manage the risks to your investment by protecting the value of your pension. However, the danger lies in the automatic switch to these low risk investments which could potentially happen too soon.


The state pension age is slowly increasing and many people are choosing to delay their retirement and work longer or take on part time work. Some people also choose to keep their savings invested during their retirement, rather than cashing in and drawing a pension. Lifestyle structures may be less suitable for these people and could limit their opportunities for a higher return in their investments.


Company pension fund trustees know that the lifestyle fund option protects them from potential litigation and are keen to take the safety first approach, even if it produces smaller pensions.


Research shows that over the last decade, bonds have provided a greater return than shares, but when compared to the last 50 years, shares have provided over double the amount of returns than bonds. However, low interest rates may now mean that bonds are overpriced. In comparison, shares may be considered a bargain.


Placing your pension assets in shares does come with risks due to the volatile nature of the stock market. However, a recent study of the past 111 years shows that, on average, shares have provided over 4 times the return on your investment than bonds. If your pension assets are transferred from shares to bonds too soon, you could miss out on extra money in your retirement.


Mark Dampier of the independent financial adviser Hargreaves Lansdown believes that autolifestyling is an accident waiting to happen. He adds, "the last 20 years have seen a bond bull market so 'low risk' assets have done well. But I suspect that won't be true going forward, particularly if inflation picks up. The problem stems from the fact that pension investors won't take the responsibility themselves."


It is impossible to be sure whether investment in shares will provide greater returns than bonds in future. It is also understandable that trustees are seeking to minimise risk. But if an individual wants to maximise the return from their pension savings and investments, they must read their annual statements and decide whether to switch out of lifestyle funds according to their own circumstances.


Retirement Solutions provide a one stop shop for retirement finance advice on retirement income, equity release and long term care






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