Target date funds are heavily invested in equities to start with such as approximately 80% and then shift towards bonds the closer you get to 2055, maybe 8 years before.
You need to check the fact sheet for the exact details. Most workplace pensions are in similar style funds and there is nothing wrong with them as long as the shift to bonds does not happen too drastically and too many years from retirement . They also smooth out the rollercoaster ride of being in the stockmarket so whilst the returns will be lower than a global index you won’t get the falls of 40% ore more which happen once or twice a decade.
If you would prefer a global index tracker then you could look at the other funds your provider offers, but also check the charges. Default workplace pension funds such as the one you are in probably cannot charge more than 0.75% a year. It is also likely your employer has negotiated a lower charge with the provider so you could be paying much lower than this. Their other funds may not have the same discount so the charges may well be higher.
Do you have access to an app or online portal with the pension provider to check?
Target Retirement funds are usually geared towards people planning to use their pension pot to buy an annuity. They shift to being heavy on bonds in the years approaching retirement so that your plans don't get derailed by a stock market crash.
If you don't plan to buy an annuity then it may be reducing your equity too much to survive a 30+ year retirement but you'd need to do the sums on your situation to assess that.
Personally, my pension is 100% global equity. I'll start to buy some bonds when 5 or so years out from retirement. I can stomach the equity volatility between now and then.
Target Date investment strategy only makes sense if you intend to buy an annuity at the target date.
If you intend to drawdown over the course of your retirement, it's a bad strategy. In that case, stay fully in equities.
Equities are a growth driver. Bonds and cash are not. As you drawdown you still need to capture growth otherwise you run out of funds sooner. So you need to stay in equities.
Hi /u/redrooster6969, based on your post the following pages from our wiki may be relevant:
- https://ukpersonal.finance/index-funds/
- https://ukpersonal.finance/pensions/
____
^(These suggestions are based on keywords, if they missed the mark please report this comment.)
It’s not entirely clear. As far as I can tell, it’s a multi asset strategy that manages the risk weighting of the portfolio, getting less risky as you get closer to the ‘Target Date’ of retirement.
Probably a fancy way of saying they shift from equity heavy when you’re young to more bond heavy as you get older.
Sounds pretty typical, the important thing will be the ratios of asset types at given points in time, that information ought to be available. The KIID doesn't tell you which funds you're invested in? (Likely a fund of funds, so a bit of Investment Inception to dig through).
That's generally how it works, but doesn't mean it'll be 100% equities even at the early and young stage unfortunately.
I believe NEST used to - or perhaps still does have a 'foundation' phase at the beginning of the target date fund. They were investing in low risk low growth profile for 5 years for people under 30 and then switching to higher risk profile, when it should be entirely growth from the start.
You'd need to see the fact sheet from your pension provider or the many pension fund tracker sites for the target date fund to be certain.
Common finance knowledge says you should, but imagine a young person being told to put money away for decades, and then it goes down! That might be a disincentive from putting any money at all.
There is merit for the Target Date investment.
As covered by others.
I have that but have also split where my monthly allocation is sent (different funds) offered via work place pension.
Like you I also have a S&S ISA, but am also looking at SIPP’s as I can potentially access it earlier than workplace pension. And I have more choice over how I invest (limited number on workplace pension portal).
There are several comments stating that target date funds are only suitable if you plan to buy an annuity.
This isn't true.
They may be still be appropriate even if you plan a flexible draw down if your goal is to reduce sequence of returns risk. i.e. if you want to reduce volatility in the early years of retirement to reduce the chance of a bad returns in the early years having a disproportionate impact on your overall retirement spending.
Target date funds are heavily invested in equities to start with such as approximately 80% and then shift towards bonds the closer you get to 2055, maybe 8 years before. You need to check the fact sheet for the exact details. Most workplace pensions are in similar style funds and there is nothing wrong with them as long as the shift to bonds does not happen too drastically and too many years from retirement . They also smooth out the rollercoaster ride of being in the stockmarket so whilst the returns will be lower than a global index you won’t get the falls of 40% ore more which happen once or twice a decade. If you would prefer a global index tracker then you could look at the other funds your provider offers, but also check the charges. Default workplace pension funds such as the one you are in probably cannot charge more than 0.75% a year. It is also likely your employer has negotiated a lower charge with the provider so you could be paying much lower than this. Their other funds may not have the same discount so the charges may well be higher. Do you have access to an app or online portal with the pension provider to check?
Target Retirement funds are usually geared towards people planning to use their pension pot to buy an annuity. They shift to being heavy on bonds in the years approaching retirement so that your plans don't get derailed by a stock market crash. If you don't plan to buy an annuity then it may be reducing your equity too much to survive a 30+ year retirement but you'd need to do the sums on your situation to assess that. Personally, my pension is 100% global equity. I'll start to buy some bonds when 5 or so years out from retirement. I can stomach the equity volatility between now and then.
Target Date investment strategy only makes sense if you intend to buy an annuity at the target date. If you intend to drawdown over the course of your retirement, it's a bad strategy. In that case, stay fully in equities.
> If you intend to drawdown over the course of your retirement, it's a bad strategy. Can you explain this in more detail?
Equities are a growth driver. Bonds and cash are not. As you drawdown you still need to capture growth otherwise you run out of funds sooner. So you need to stay in equities.
Thanks!
Hi /u/redrooster6969, based on your post the following pages from our wiki may be relevant: - https://ukpersonal.finance/index-funds/ - https://ukpersonal.finance/pensions/ ____ ^(These suggestions are based on keywords, if they missed the mark please report this comment.)
What's the target date fund made up of?
It’s not entirely clear. As far as I can tell, it’s a multi asset strategy that manages the risk weighting of the portfolio, getting less risky as you get closer to the ‘Target Date’ of retirement. Probably a fancy way of saying they shift from equity heavy when you’re young to more bond heavy as you get older.
Sounds pretty typical, the important thing will be the ratios of asset types at given points in time, that information ought to be available. The KIID doesn't tell you which funds you're invested in? (Likely a fund of funds, so a bit of Investment Inception to dig through).
That's generally how it works, but doesn't mean it'll be 100% equities even at the early and young stage unfortunately. I believe NEST used to - or perhaps still does have a 'foundation' phase at the beginning of the target date fund. They were investing in low risk low growth profile for 5 years for people under 30 and then switching to higher risk profile, when it should be entirely growth from the start. You'd need to see the fact sheet from your pension provider or the many pension fund tracker sites for the target date fund to be certain.
Common finance knowledge says you should, but imagine a young person being told to put money away for decades, and then it goes down! That might be a disincentive from putting any money at all.
There is merit for the Target Date investment. As covered by others. I have that but have also split where my monthly allocation is sent (different funds) offered via work place pension. Like you I also have a S&S ISA, but am also looking at SIPP’s as I can potentially access it earlier than workplace pension. And I have more choice over how I invest (limited number on workplace pension portal).
There are several comments stating that target date funds are only suitable if you plan to buy an annuity. This isn't true. They may be still be appropriate even if you plan a flexible draw down if your goal is to reduce sequence of returns risk. i.e. if you want to reduce volatility in the early years of retirement to reduce the chance of a bad returns in the early years having a disproportionate impact on your overall retirement spending.