How To Protect Your Pension

If you're worried the value of your pension could fall dramatically if the stock market crashes just as you want to retire, there is a free and easy way to protect your fund.

If you're a pension investor, or any type of investor for that matter, I wouldn't blame you for feeling a little anxious over recent volatility in the stock market. Equities -- that's a fancy word for shares -- have certainly been choppy lately, but it's important not to focus too closely on short-term performance, particularly if you have a long-term investment such as a pension.

Now could be an ideal time for you to look at how your pension fund is invested and consider protecting it from weak stock market performance.

If your pension fund has a high equity content, it may be worthwhile switching into lower risk funds as you get closer to retirement. Fixed interest securities such as corporate bonds (fixed interest loans issued by companies) and gilts (fixed interest loans issued by the Government) may be more suitable for you and will mean your fund is sheltered from a possible stock market slump.

But bear in mind that even though your pension fund may be moved into less volatile assets, it is still exposed to some degree of investment risk. And you may need to stay invested in equities if you feel that your pension pot isn't big enough yet.

I would suggest that this type of switching strategy should start around ten years or so before you intend to take your pension benefits allowing you to take full participation in stock market growth up to this point. But it does mean that you have to actively take control of your pension planning. If this level of involvement doesn't particularly appeal to you there is an easy alternative.

Lifestyling

A number of pension providers offer a mechanism known as 'lifestyling'. This is a process where your accumulated pension fund is automatically restructured so that money is gradually moved out of the higher risk and more volatile assets, such as equities, into lower risk alternatives as you get nearer to your selected retirement date (SRD). Some lifestyle options simply switch into a cash fund while others move your pension into a combination of bonds/gilts and cash.

Here we take a look at three well known pension providers - Legal & General, Prudential and Standard Life to give you an idea of the main strategies that are available to you, but don't forget that many other companies offer a lifestyle option of one sort or another and some even use a lifestyle profile as a 'default' fund when investors opt out of selecting a specific fund for their pension contributions altogether.

Lifestyle Options

Legal & General offer eleven Lifestyle Profiles which implement the automatic switching process in a different way depending on the profile you choose. A major advantage of the Lifestyle Profiles is that, unlike the Standard Life options where your initial fund choice is pre-determined, you are able to invest in any fund of your choosing from their in-house or external pension fund ranges up to a maximum of ten funds. You can also switch into an alternative non-lifestyle fund or to another Lifestyle Profile as you wish, free of charge.

This is also the case with Prudential where you can choose any fund available from the pension range to invest into at outset with lifestyling coming into play at either eight or ten years prior to your SRD. Most lifestyle strategies switch funds annually although Prudential allow monthly switching.

The lifestyle options available through the Standard Life Personal Pension One scheme are a little more restrictive and can't be combined with any other funds or investment strategy (with the exception of investment in the with profits fund). Four strategies are on offer including the Cautious, Balanced, Global Equity and BGI Global Equity 50:50 Index Profiles with the Cautious Profile appealing to those of you who are more risk averse and the two global profiles better suited to the more adventurous.

Even if you have not chosen a lifestyle option at inception it is usually possible to adopt this approach later on or to move your pension back to a non-lifestyle fund should you change your mind. The trick with lifestyling is to capitalise on the growth your pension has made over the long-term and protect it by adopting a lower risk investment strategy. Although this approach won't suit everyone it could mean that a sudden stock market collapse just as you're about to retire could cause you less of a headache.

Here are the main advantages and drawbacks for you to consider:

Advantages

• Provides peace of mind that your pension fund will protected from a dive in the stock market as you near retirement
• Lifestyle options can be selected at outset and shouldn't cost you anything extra. The switching process will be carried out automatically. There is nothing more for you to do unless you want to take a more active approach yourself
• It is ideally suited to the lower risk profile that many investors move towards as they get older

Drawbacks

• Lifestyle options are based around your SRD (selected retirement date) but you may find you need to invest into your pension beyond this date if your fund hasn't fared well over the years or if you started putting money into a pension at a relatively late stage. Cash funds should only be a temporary home for pension funds and you may need to reconsider your strategy in these circumstances
• The process is based on the greater stability provided by fixed interest securities and cash. But the prospects for these assets may not always be as constant as you might think. In fact, many analysts expect returns from fixed interest to be pretty neutral this year. By moving out of equities you could potentially miss out on strong capital growth. Remember that equities typically deliver higher returns than cash or bonds over the long-term.
• Investment decisions are taken away from you. If you want a more hands on approach to planning for your retirement, lifestyle options are probably not for you

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