Speak to a Saltus expert...
Please fill in your details to arrange a financial review with one of our financial planning or investment experts.
How it works:
- We will call you back to find out more about your aims and requirements
- We will arrange a meeting with one of our team at a convenient time, either over the phone, on video, at your home or workplace, or at one of our offices
- You will be able to ask any questions you have and find out more about managing your wealth with Saltus
- Your review will be at our cost and there is no obligation to work with us afterwards
Who we work with:
- Individuals with £250,000 or more in investable assets. This includes pensions, ISAs, other tax-wrappers and cash available for investment.
Your life savings are most likely in a default pension fund and you probably don’t even know how the fund is invested.
In fact, according to research by the Pensions Regulator, 96% of people that have a defined contribution scheme are invested in the pension scheme’s default fund.
What is a default fund and is it a good option for you?
Since 2012, your employer has been legally required to enrol you in a pension scheme. Your pension provider is obliged to offer an investment option to its members to grow their pension fund. This is, typically, a low-cost investment fund with some level of diversification applied. It’s common for them to be a medium or low-risk profile, and often, they’ll contain passive equity trackers and fixed income holdings.
Low cost, diversified, trackers, what’s not to like? Well, potentially a fair amount…
The benefits of a pension default fund
Some positives come with default funds: the costs are low and are capped by the regulator at 0.75%, so you know this won’t escalate over time. However, the primary benefit is that you won’t have to make any decisions.
It’s an easy solution for those without any interest in investing as your pension is more likely to grow than if you were just holding cash. Unfortunately though, our inherent laziness and lack of engagement with our money continues to be served by default funds and you could be losing out as a consequence.
Why default funds might not be appropriate
Default funds attempt to be appropriate for the young, the old, risk-takers and those who are more cautious. By definition then, they are rarely appropriate for anyone as we all have different feelings towards risk, varying capacity for loss and differing objectives for our money. Your investment strategy should reflect this if you want to achieve the best outcomes. In reality, the ‘new joiner in their early 20s’ probably shouldn’t have their pension invested in the same way as say an employee that’s been with a firm for 30 years and is starting to look towards retirement.
To tackle this issue, many default funds have life-styling properties. When you join the pension scheme, you will select a retirement age. At a set period before this date, usually in the region of five to ten years, the fund will start to automatically de-risk by reducing the equity exposure and often moving portions to cash. Given that most individuals fail to engage with their pensions, it is understandable that steady de-risking towards retirement is considered a sensible generic position to take. However, retirement does come abruptly in many cases – one week you are at work and the next you are attending your leaving party. De-risking your investments ten years prior to this event then, seems likely to negatively impact the growth potential of your funds. Perhaps unnecessarily so, given that your life at this stage will look very different to how it might at retirement.
Meet your financial needs and objectives...Speak to an expert
It’s also worth highlighting that a significant number of default funds move entirely to cash at retirement age. This is more common in older schemes and is a hangover from when pension funds were typically exchanged for annuities. ONS data shows that someone in their 40s can, on average, expect to reach the age of 85. They’ll also have a one in four chance of reaching 95! So, if you retire at 65, your pension is probably going to need to continue being invested for another twenty and possibly even thirty years. You’ll likely need to continue to grow the funds over and above inflation to meet your needs. The last thing you’ll want is swathes of cash or an overly de-risked strategy that doesn’t align with your retirement objectives.
Why default funds have a lack of diversification
Recently, there have been significant criticisms of the 0.75% charge cap that is in place. The limitations on costs have often resulted in highly UK-centric default funds that have a very limited asset allocation. Quantitative easing and the recent inflationary environment have exacerbated this issue. Bonds and equity have become positively correlated and rising interest rates have seen bond prices fall at a rate we haven’t experienced since the 1990s. More sophisticated alternative instruments need to be deployed to attain diversification, but these aren’t always cheap options. This often means that default funds aren’t sufficiently globally diversified and can suffer unnecessary levels of volatility due to a lack of diversification in asset classes.
Ultimately, your money should be invested for your circumstances and in line with your objectives, whilst considering your attitude towards risk. The asset allocation of your strategy should be flexible in current market environments and have access to a wide range of options to provide sufficient diversification to protect your capital in drawdown. It’s unlikely that a default fund will be able to achieve all of this. I’m not suggesting that this means everyone should sell out of their default funds though. Unless you are an experienced investor, they are still going to be a preferable option compared to trying to build your own portfolio. However, if you have a reasonably sizeable pot and can access advice – please do so. A professionally managed investment strategy supported by a robust financial plan will undoubtedly improve your chances of success.
All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.
Saltus Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.
Find out more about our award-winning wealth management services…
Financial Advisory Firm of the Year
Client Relationships Award
Financial Services, Banking and Insurance Firm of the Year
Investment Performance Cautious Portfolios
Best Medium Firm
Investment Performance: Cautious Portfolios
Investment Performance: Balanced Portfolios
Financial Planning Firm of the Year: Small to Medium Firm
Financial planning can help you reach your goals in life, whether you want to determine when you can retire comfortably, bring organisation to your financial world or pass on your wealth effectively.
Pensions and retirement planning
Deciding when to retire is a challenging decision and can feel like a leap of faith. At Saltus, we gather information on all of your existing assets and then use our technology and expertise to show you exactly how to achieve the retirement you’re after.
Reducing your tax burden
How to structure your wealth and access income should be approached in a sophisticated way. A detailed financial plan may use pensions, ISAs, general investment accounts, offshore bonds and other tax wrappers to ensure you can draw your money in a tax-efficient manner.
Consolidating your wealth
Holding multiple investment accounts and pensions can mean they’re hard to keep track of and administer. We’ll help you overcome this by consolidating your accounts into a single plan so that you can understand your financial position with ease.
Protecting you and your assets
We protect our cars and houses without much thought yet you might be the most valuable asset in your family. Whatever your situation, we can provide advice to ensure you have the right level of insurance in place to keep your finances protected.
Passing on your wealth
Estate planning is more important than just having a Will. We’ll work closely with you to understand how estate planning, which has emotional as well as financial consequences, can impact your overall financial plan.
Significant life events
Significant life events can present great opportunities but also considerable challenges. Whether you are going through a business sale, divorce or are receiving a lump sum, we’ll help build a financial plan to meet your changing lifestyle.