Hi
This is a great question and a great time to consider your options.
At the time you leave employment you will be presented with several options including:
- Purchase an annuity
- Purchase an approved retirement fund (ARF)
- And possibly if you are a member of an occupational pension scheme and based on the size of the fund and your final salary to take most of the fund as tax free cash
- If you retire early you will be presented with options to defer benefits in the current scheme or possibly transfer to a new scheme
Let's consider the implications of your
current investment policy on your future retirement options.
1) If your ultimate decision is going to be to purchase an annuity at your selected retirement date then the most appropriate strategy will be to manage your asset allocation towards an approximate 75% fixed interest portfolio and 25% cash at your selected retirement date. This is now often achieved by applying an automatic (and often default) life styling option which progressively de-risks your portfolio as you approach retirement.
This approach is popular with pension trustees as it represents the default position of many occupational schemes.
2) However, some people may wish to consider the option of an ARF in retirement drawing their pension income directly from their pension fund rather than purchase an annuity.
Under these conditions, the default lifestyle option is almost certainly the wrong approach to take since with an ARF there are several layers that need to be considered including
Taking part of the fund as tax free lump sum, if the fund is large enough taking some of the fund as a taxable lump sum, the need for an Approved minimum retirement fund (AmRF) and a suitable investment strategy for an ARF.
Each one of these components needs to be considered as a relevant transaction that needs to be made at retirement.
There is also the option for those with a Personal Retirement Savings Account (PRSA) to have multiple pension strategies (phased retirement) whereby some pensions are left to grow while others are invested to provide lump sums and income. Lots of options depending on the personal circumstances of the individual.
The point about a suitable investment strategy for an ARF is regularly overlooked and I frequently see examples of what we describe as "mis-buying" whereby the investment strategy followed by the ARF investor is recklessly conservative and after costs unlikely to match the guaranteed income that they have given up from the annuity.
Under these conditions it can be said that the allocation now to risky assets should be higher for an investor expecting to ARF than it would be for someone expecting to purchase an annuity.
Finally, for those able to access all or most of their fund as a tax free lump sum, the current investment strategy should ideally derisk to a pure cash position at selected retirement age.
Hopefully, you can see from this that the "right" investment approach to take today is heavily influenced by the retirement strategy you intend to follow in retirement.
Given all the variables the best approach would be to seek a fee-based (impartial) Independent (not working for a bank) Certified Financial Planning Professional (specialist) with at least 10 years experience and have a discussion about where your current pension fits in with your overall long-term plans, if there is anything else you should be considering (paying down debt, making a will, enduring powers of attorney) as part of your long-term financial plans.
A list of prospective advisers can be found here
www.sfpi.ie
For full disclosure I am a founder of the SFPI and sit on the committee.
Hope that helps.