17 April 2014

Are your pension "Lifestyle" funds bad news?

Many pension plans are in Lifestyle funds (and here we're mainly talking about personal pension plans including those arranged by your employer, but not defined benefit / final salary pensions).

In many cases they are the default fund if you don't choose anything, which is not a bad approach if you don't know any better (although I'm not a fan myself). The way they work is that your money is moved into supposedly less risky assets (like gilts) as you approach your chosen retirement date. The idea is to reduce the risk of last minute drops in value, just before you use the whole pot of pension money to buy an annuity. 


With the new-found freedom not to buy an annuity expected from April 2015, why would you do that? If your pension will remain invested after retirement so that you can take a bit a time, it would be much better to remain invested in riskier / growing assets and continue to benefit from longer term growth.

I'm sure there will be many consequences (foreseen and un-foreseen) of the latest pension freedoms and this is one of many.

14 April 2014

Smart Beta - A Different Investment Approach?

The debate about active versus passive investment strategies has been going for some years now. That rather suggests to me that there are merits in both approaches (although I lean towards an active approach in advising clients).

However, a more recent approach is "Smart Beta" (which also goes by other names). Here's the basics.

Rather than following an existing index such as the FTSE 100 - which is what a passive equity fund might do - a Smart Beta approach recognises that such as index is not necessarily a good indication of current value nor of future performance. That's because an equity index is based on the share prices of a range of companies (normally included in the index on a weighted basis), and share prices include not only the fundamental value in a company but some sentiment too, which might push the share price up or down.

Instead a Smart Beta approach might look at the fundamental value of a range of companies as shown in its accounts or by reference to its dividends, for example.

It's an interesting approach, but possibly too soon to judge its merits.

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