If you’re considering drawdown as an option for your pension, you’ll need to think about where and how you’re going to invest your money.
The DIY Investor
Since pension drawdown became the more popular option for pension income withdrawal, there has been an upsurge in the Do It Yourself investor. As with most tasks, if you know what you’re doing, why not and save money on it rather than pay a professional.
If you know how to fix a car, fit a kitchen or build your dream holiday, why use a mechanic, Joiner or Travel agent?
The DIY investor, tends to be someone who’s had experience of investing before, either through investment ISA’s, share clubs or with having a general interest in investment and markets.
There are many companies who offer Self Investment Personal Pensions (SIPP’s), to cater for the DIY investor and who offer fund research tools, information and online trading.
Hargreaves Lansdown is probably the biggest player in this market and the access to information is huge. They are on the expensive side compared to other players in the market however.
Tilney BestInvest is another popular choice with dealing costs and platform charges slightly less than Hargreaves.
Fidelity has an excellent website with fund research and risk testing tools.
If you’re more comfortable with a larger, well know brand LV offer access to a pension drawdown plan at a reasonable price but with a limited amount of fund.
Using a Financial Adviser
For those who want to use pension drawdown for its flexibility, but aren’t confident picking their own investments, financial advisers can help.
The advantage of using a financial adviser is that they know the market. They deal with the pension providers and investment houses daily, and will therefore be able to recommend the most appropriate plan and portfolio of investments.
A good financial adviser will listen to you needs, explain how investment funds and drawdown works, measure your attitude to investment risk and then after some research, recommend a suitable drawdown plan.
Measuring attitude to investment risk is a vital part of this process. It’s important to have a group of investments that won’t surprise you. Investing has risk, but it’s important to understand how much risk you can afford to take and what the worst case scenario may look like.
Some investment funds target a certain level of risk. Think of a scale of 1 to 10, 10 being high risk and 1 being low. A fund manager may set out his fund to be a risk level 5. This means there is a certain mix of shares, bonds & gilts, property and cash within it. In this instance, the manager will always ensure the fund stays at a risk level 5, as he’s attracted investors who want a medium level of risk.
He won’t suddenly dump all his shares and hold the fund in cash or conversely only hold shares, as that would be a risk level 10.
It is therefore important to hold a portfolio of funds which overall, match your risk level.
The financial adviser should ensure your portfolio is also well diversified, meaning the risk is spread over asset classes, sectors and geographically.
There is a charge to use a financial adviser over DIY investing, but the charge could be worth paying over making the wrong provider and investment choices.
A few providers, since the pension freedoms came into effect, have started a non-advised pension drawdown service.
This is to enable those who don’t want professional financial advice, to use drawdown.
The service on offer usually provides information on various options and pre-built portfolios, with the client ultimately picking a portfolio they feel best suits them.
This is an uncomplicated way to use drawdown, however fund choice is often severely limited. Portfolios are generally built with the cautious investor in mind which will restrict potential growth in rising markets.
There is usually still a charge from the provider to set a non-advised plan up, but unlike taking advice through a financial adviser, there is no recourse or compensation if the wrong investments are picked.
Using a Discretionary Fund Manager
This is an option which has traditionally been used by those with larger pension funds.
A discretionary fund manager will build a bespoke portfolio of investment based on the client’s risk tolerance and strategic objectives.
The manager has the right to change the client’s investment portfolio without prior consent, allowing them to react quicker to market conditions. They monitor portfolios closely and seek out opportunities which after acting on, will report back to the client.
Unlike DIY investing or a Financial Adviser built portfolio, you can get to meet the fund manager who has control over your money. A Discretionary fund manager has a limited number of clients and therefore aims to have a personal relationship with each.
The minimum fund values for this type of management are upwards of £250,000 and the ongoing charges will usually be more expensive that using a financial adviser. The service is more personal however, and if that gives more confidence and ultimately performance, it’s an option worth considering.
Pension Drawdown involves investing and investment risk. It’s not a product for an inexperienced investor or one who is nervous of stock markets. Pension funds are usually people largest and longest committed savings plan, it’s highly important therefore, that these are correctly managed through retirement.
We recommend speaking to Pensionwise if you’re unsure of your options at the outset.