The anticipated increase in the Bank of England base rate tomorrow has highlighted concerns over lifestyle funds, which by an average of 8.66 per cent since August 2016 as a result of falling gilt prices.
Annuity rates have increased 16 per cent since they bottomed out in September last year. Back then a £100,000 pension would buy a 65 year old £4,495 of secure annual income, whereas now it would buy £5,209. Prior to the arrival of pension freedoms in April 2015, around 90 per cent of people bought an annuity to provide their income in retirement. Since that time, only 12 per cent of people accessing their pension have secured an annuity with far greater numbers opting to remain invested whist drawing down what they need to live on.
Hargreaves Lansdown senior analyst Nathan Long says: “This derisking issue with lifestyle funds is not a problem if you are buying an annuity, but this is not the case any more for the majority of people. Our biggest concern is that people don’t know what they are invested in.
“People in these funds have done pretty well over the last five years, when values have risen by 38 per cent, but when people hear de-risking, they see it as no risk. If you are targeting cash, you should be switching into cash. It is going to give you virtually no return, but it the money is going to be there.”