We have been examining the pension arrangements of a client today and identified an issue that probably applies to a lot of people.
The client expects to take retirement benefits in of early 2014 probably, because he is eligible to do so, in the form of an enhanced annuity due to a medical history that warrants such an enhancement.
He doesn’t want to take benefits now because together with his earnings any pension income at this point will suffer 40% income tax.
However he has multiple pension funds invested primarily in quite adventurous equity based funds.
For example, out of total pension fund value of £263,632, 25.5% of these funds are invested in a Japanese equity fund.
A further 10% is invested in a Far East Equity Fund and 16% in a European equity fund.
He has a Self Invested Personal Pension (SIPP) which is 100% invested in shares quoted on the London Stock Exchange which together with a UK equity fund amounts to 21.6% of the total.
A further fund invested in US equities and that amounts to another 5%.
The balance (21.9%) of his pension funds are invested in cash, commercial property and a With Profits fund.
All in all then some 78.1% of his pension funds are exposed to equities.
Now to be fair these have served him quite well to date and may still continue to generate profits between now and his intended retirement date. But which now do you think is most important, securing the capital value of his fund ahead of buying an annuity or continuing to take what is quite a large equity risk?
Our view is that protection from any downside between now and retirement outweighs the potential loss of future equity gains.
Leaving a significant part of your pension fund exposed to such risk ahead of taking benefits seems to us a risk not worth taking.
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