Pension Investments

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How we structure our pension investments can make the difference between a long, comfortable retirement and a daily struggle to maintain the lifestyle we want.

There are several general principles everyone should follow, as well as more specific considerations which depend on the underlying structure of our pensions and how they affect us personally.

The first step is to understand the type of plans we hold and the applicable terms and conditions. Pension plans vary according to the regulations in place at the time we started them, whether these rules have changed, the product provider’s internal procedures, and the services available.

Internationally mobile people and expats who hold UK pensions have other issues to be aware of. EU-based residents have seen cuts to services provided by UK pension companies since Brexit. In the same way that some UK banks closed accounts for their non-UK resident customers, many pension providers have reduced services and restricted the level of advice available. Most UK advisers are also unable to provide advice due to the loss of EU passporting.

This means non-UK residents are left out on a limb with very little access to advice and services from the UK financial services industry.

A solution does exist, but I’m not holding my breath. The EU Withdrawal Agreement could be enhanced to include a more comprehensive section on financial services, thereby creating a common-sense approach to the provision of advice. As we know, common sense isn’t that common, and any political move that implies a closer relationship with the EU is highly sensitive in both the UK and the EU.

Thankfully, products are available which can help bridge the advice gap. There are several Self Invested Personal Pension (SIPP) providers that accept transfers from non-UK residents. This means EU expats can access comprehensive advice services and manage their pension investments with greater clarity.

A strategy for the selection of pension investments

The next step is to assess the underlying investments to ensure they remain appropriate for your circumstances.

As a rule of thumb, pension investments should be allocated to more performance-driven funds during the build-up phase. So, if you have plenty of time to go before retirement, you can take more risk, as any periods of low growth or losses will have time to recover.

Similarly, as retirement approaches or if you are already retired, risk should be reduced as your priorities shift from building wealth to preserving it.  This isn’t a one-size-fits-all theory, as everyone’s situation is different. For someone completely dependent on income generated from personal pensions, it’s usually advisable to minimise risk. Those with other assets might be able to take on more risk with their pension plans if, for example, they own rental properties, investment platforms, or other income-producing assets.

Assuming a transfer to a Non-Resident SIPP is possible and a suitable EU-based adviser has been appointed, how do we then decide where to invest and with which investment fund providers?

Here’s a checklist to help with portfolio allocation:

• Annual Management Charges. Most funds quote an AMC, but this can be misleading. The most accurate way to assess total charges paid to managers is to determine the Overall Charges Figurre (OCF). This shows the total cost of the fund, including any additional fees paid to your adviser. As a rule of thumb, the AMC should be roughly equal to the OCF. If not, hidden fees are being paid. In my view, this should be a big red flashing light, and you should be very careful.
• Past performance is no indication of expected future returns, but can be a good way of comparing funds in the same sector. Past performance figures should be real and not simulated. A competent adviser will be able to access a wide range of funds and recommend a portfolio according to which funds are considered best for you. This can’t happen if the adviser can only offer a limited range of ‘in-house’ funds.
• Make sure the funds you invest in are properly regulated in highly respected territories. In my view, there is no good reason to invest in funds based in obscure countries, especially if they are unregulated. Do use funds based in countries such as the UK, Ireland, Luxembourg and the USA. Don’t invest in funds based in countries without the necessary investor protection legislation in place.
• Esoteric investments. Again, there is no good reason to invest in esoteric funds. No matter how compelling a case is made for investing in sectors such as Legal Financing, off-plan property schemes in far-off islands or Eucalyptus farms in Nicaragua (this was real!), steer well clear. This type of fund almost always fails, leaving investors with no money and nowhere to complain.
• Consider Exchange Traded Funds (ETFs) where appropriate. Statistics show that ETFs outperform ‘Active Managers’ 70% of the time in the world’s major markets. ETFs follow a chosen index and are managed automatically. Annual fees are much lower than with Active Funds, and investors usually receive better returns.
• Spread risk. Putting all your eggs in one basket is risky and rarely works. It’s ok to invest in certain high-risk assets with a small proportion of your overall wealth, but pension investments should be safe from the possibility of total loss. Your adviser will work with you to assess your attitude to risk and tolerance for loss. Your portfolio can then be constructed using an asset allocation that reflects your risk profile.
• Make sure your currency base reflects your outgoings. It’s important to ensure you invest or generate income in the currency you use day to day. This may include a mix of currencies depending on where your assets and liabilities are based.
• Make sure you know the tax implications associated with your pensions. It’s always best to take professional advice before making withdrawals or switching funds. Similarly, you should be aware of the tax implications according to residence and inheritance.

Everyone is different, and any specific issues important to you should be incorporated into your plan. Most reputable advice companies will offer a free initial consultation to assess your current position and how it might be improved.

No one can predict the future, but we can make sure we are prepared for as many eventualities as possible. Your pension portfolio should be invested to withstand the ups and downs of the global economy. Regular monitoring is a vital part of the process, and your pension platform should be flexible enough to respond quickly when changes are needed.

If you would like to find out more about pension investments, please complete the form below:

https://axis-finance.com/contact

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