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6 Reasons you might consolidate your pension pots

Have you ever considered moving and consolidating your pension to another scheme or provider? There are a whole host of reasons why people might want to do this before they reach retirement. Some are looking for better fund performance, lower charges or better death benefits; others are simply changing jobs.

Most schemes will allow you to move your pension pot to another pension scheme, which could be a new employer’s workplace pension scheme, a personal pension scheme, a self-invested personal pension (SIPP) or a stakeholder pension (SHP) scheme.

 You don’t have to decide straight away – you can generally do this at any time up to a year before the date that you are expected to start drawing retirement benefits. In some cases, it’s also possible to move to a new pension provider after you have started to draw retirement benefits.
Before taking any action, it is essential you obtain professional, expert financial advice.

1.  Moving to a new employer

When you leave one job to move to another one, you are treated as having left the workplace pension scheme, but you do not lose the benefits you have accrued. At this stage, you may decide that you want to consolidate your pot to the scheme offered by your new workplace.

But if you are thinking about doing this, it is important to do it for financial – and not emotional – reasons. It’s crucial that you don’t move your pension pot out of a first-rate scheme simply because you want to cut all links with an old employer.

2.  Looking for better performance

Some people opt to consolidate their pension because they are in an underperforming scheme delivering poor – or non-existent – returns. If your scheme is performing poorly, you may well want to move your money elsewhere.

But once again you need to ask yourself whether you are prepared to invest your pension pot in higher risk funds to potentially obtain a better return. If you are approaching retirement age, you need to think particularly carefully before making such a decision.

No guarantees are provided regarding the performance of any new scheme and/or any underlying investment funds/solutions. As such, there is no guarantee equal or higher returns will be achieved when compared to your existing arrangement(s).

3.  Seeking out lower charges

You may want to consolidate your pension because your scheme comes with high charges which eat into your returns, leaving you with less money in retirement.  This is a really important area as many people have pension funds in highly charged products that were taken out many years ago.  It's important to look into these in terms of product charges, investment charges, investment performance and whether or not the funds you are invested in are the most suitable for you.

4.  Wanting to access a wider range of funds

At the same time, consolidating your pension may sound like a good option if you want to gain access to a wider range of funds than those offered by your current scheme.

5.  Searching for better death benefits

If you feel the death benefits on offer with your current scheme do not match up to those offered by more modern schemes, you may want to consolidate your pension to a different scheme.

You might, for example, want to move your money into a scheme that allows one of your relatives to inherit your pension when you die, rather than simply spouses or dependents. The same might apply if you are not married to your long-term partner but want them to inherit your pension once you’re gone.

6.  Wanting to consolidate several pensions

As people change jobs more frequently during their working life, they often accumulate a number of small pensions along the way. It can be hard keeping track of schemes, and difficult to really know how much your total retirement is worth.

For many people this is an important consideration, as peace of mind comes from understanding that what you have will ensure you enjoy a comfortable retirement, or action results from recognising that this might not be the case!

Think carefully before making the switch

You need to be careful before moving your pension pot out of certain schemes – including public sector schemes, such as the nurses’ or teachers’ schemes – as these offer extremely generous benefits which can be hard to replicate elsewhere.

Equally, if you are thinking about moving your personal pension to another provider, you must check that the benefits are not outweighed by any exit penalties and entry charges.

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A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

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Topics: Retirement Planning, pensions

Written by Chris Weetman on 07-Jun-2017 09:00:00

Sustainable investing

Strategies to meet some of the most pressing global challenges ahead

Many investors see Sustainable investing as a means of obtaining financial returns whilst helping to achieve a positive impact on the world around them.  As companies globally wake up to the commercial benefits of working sustainably, there are many opportunities that allow you to achieve the goals and objectives of your financial plan without having to compromise on your values in doing so.

Long viewed as a niche asset class catering to wealthy individuals and institutions that wanted to avoid controversial industries, the phrase ‘sin stocks’ emerged to describe firms linked to industries perceived by some to be unethical, such as tobacco, alcohol or gambling. Such funds will exclude these stocks or screen them out, but each investor has views on what is and isn’t ethical.

Close evaluation

Rather than merely screening out certain stocks, sustainable investing is about closely evaluating a range of environmental, social and governance issues, known as ‘ESG’. This could be analysing a company’s track record on pollution from its factories, or how socially responsible it is in the communities it operates.

On corporate governance issues, it is a matter of judging how well the interests of shareholders, customers and staff are managed. Well-managed companies that care about the sustainability of the world in which they operate should have a better long-term future. Sustainable investment is really about integrating ESG considerations into the investment decision-making process, with a view to enhancing returns.

Enhanced performance

Studies by Friede, Busch & Bassen (2015) and Morgan Stanley, to name but two, found that companies focused on ESG had, on average, enhanced financial performance.

A study by Empirical Research, which has been evaluating and monitoring 60 ESG factors since November 2014 for US stocks, found that those companies with better ESG scores outperformed those with lower.

Better understanding

By examining ESG issues, investors gain a better understanding of not just what companies do but how they do it. ESG analysis puts companies into a wider global context and helps to identify which ones have the most resilient models.

Investors can choose investments based on moral beliefs and personal values, but that would be ethical investing rather than sustainable investing.

Environmental issues

It would be easy to assume that the ‘E’ of ESG dominates the other two. Many of the thematic investment funds in the space focus on environmental issues, from water shortage to new environmental technologies. And environmental issues, especially in the wake of the COP 21 Climate Change talks in Paris in 2015, are high up on investors’ minds. However, social and governance issues are of increasing importance.
Rising inequality and strapped governments has led to the introduction of Living Wages in a number of regions, putting pressure on costs.

Changing consumer tastes and new regulation has seen the introduction of sugar taxes and ongoing declines in sugary drink consumptions. CEO pay and boards are rarely out of the headlines.

Holistic look

Successful ESG investment processes take a holistic look at the changing world companies have to navigate and assess the performance of their investment across a number of factors. They engage where performance is lacking, pushing companies to improve their performance in ESG factors across the board and accepting the need for continual improvement in these areas.

The bulk of ESG data that we have is disclosed by large companies operating in developed markets. This does not mean that ESG considerations are not pressing for those in emerging markets.

Lower volatility

A 2013 report by UBS, analysing the World Economic Forum (WEF) Corporate Governance Index and emerging market equities valuations, concluded that companies that score well on governance are valued more highly and have lower volatility. Evaluating how companies manage stakeholders and environmental and social change is relevant whatever the market. With emerging markets, it may just take more investigation.
We tend to think mostly about equities, but it doesn’t end there. With bonds, for instance, ESG analysis helps identify risks to a borrower’s ability and willingness to repay debts. A well-managed company should be less likely to stumble into value-destroying disasters and be better positioned to repay investors who lend them money.

 

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INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

 

 

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Topics: Investment

Written by Chris Weetman on 03-Jun-2017 08:22:38

Financial planning for retirement?

Men narrow the gap on women when it comes to life expectancy

Thanks to healthier lifestyles and advances in medicine, people are living longer lives, but many individuals may not feel financially prepared for their retirement. When it comes to retirement and setting your investment goals or strategy for your financial planning, there are two main options.

If you’re looking to build up the value of your investments over time, you’re investing for growth. Alternatively, if you’re aiming to get a regular income from your investments, then you’re investing for income.

Some investors think of cash as a safe haven in volatile times, or even as a source of income. But the ongoing era of ultra-low interest rates has depressed the return available on cash to near zero, leaving cash savings vulnerable to erosion by inflation over time. With interest rates expected to remain low, investors need to be sure that an allocation to cash does not undermine their long-term investment objectives. Cash left on the sidelines earns very little over the long run.

Eighth wonder of the world

Compound interest has been called the ‘eighth wonder of the world’. Its power is so great that even missing out on a few years of saving and growth can make an enormous difference to your eventual returns.

You can make even better use of the magic of compounding if you reinvest the income from your investments to grow the starting value even more each year. Over the long term, the difference between reinvesting the income from your investments and not doing so can be enormous, so can the impact on your financial plan.

While many investors know what they should probably do to win the investment race i.e. set a long-term strategic plan, use high quality, low-cost funds and rebalance, too many appear to be tempted into responding to market noise and short-termism, resulting in too much investment activity.  Such an approach – grounded in behavioural biases – risks losing the investment race.  Being an investment tortoise is better than being an investment hare.  Focusing on the long-term likelihood of success is key.  

The lesson is to not panic

The last ten years have been a volatile and tumultuous ride for investors, with natural disasters, geopolitical conflicts and a major financial crisis. It’s important to have a plan for when the going gets tough instead of reacting emotionally. The lesson is to not panic: more often than not, a stock market correction is an opportunity, not a reason to sell. Market timing can be a dangerous habit. Corrections are hard to time, and strong returns often follow the worst returns. But often investors think they can outsmart the market – or they let emotions like fear push them into investment decisions they later regret.

While markets can always have a bad day, week, month or even year, history suggests investors are much less likely to suffer losses over longer periods. Investors need to keep a long-term perspective. A diversified portfolio also provides a much smoother ride for investors than investing in just equities.

New Call-to-action

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

 

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Topics: Retirement Planning, Investment

Written by Chris Weetman on 22-Mar-2017 09:00:00

How to protect your investments from inflation

Are we seeing the return of inflation?

It has been easy to grow complacent about inflation in recent years. The rate of inflation has remained stubbornly low, but could inflation be finally returning to Western economies, aided by the ‘Trumpflation effect’?

Concerns about inflation were already on the rise, and Donald Trump’s victory in the US election last year has further stoked expectations that price pressure, absent in most Western economies since the financial crisis, may make a return in 2017 and beyond.

Price rises

Opinions differ as to the level it will reach and whether it can be sustained, but investors should be planning to hold the right assets to guard against any havoc caused by rising prices. There are two central explanations as to why prices rise at different speeds over time.

The first is that of ‘money supply’, which influences the likely level of prices. This is the view of the monetarists who believe that inflation can be controlled by changing the level of money that circulates in the economy, for instance, overcoming low inflation by adding more money via programmes such as quantitative easing (QE).

Another view is held by Keynesian economists, who treasure the beliefs of the British economist John Maynard Keynes. They believe that demand is the central reason for a change in prices.

Currency values

Western economies such as the UK and US have experienced similar levels of inflation in the last few decades, and in more recent years lower commodity and labour prices along with strong domestic currency values have kept inflation to record lows, which have been welcomed by Western households as their cost of living remains lower.

A number of Western economies are now growing steadily following the turbulence of the post-financial crisis years, and this is creating modest inflationary pressure. It could be that QE programmes – the electronic creation of money by central banks – has helped, although this is open to debate. Some argue that QE may have stored up inflationary pressures for the future that are yet to be felt.

Exceed inflation

The aim of investors is to grow their money at a rate that will meet their goals and comfortably exceed inflation. Although more volatile, stock market investments have historically performed well, benefiting from the earnings of companies usually rising along with inflation and when dividends are reinvested. It is these dividends that help in the battle to beat inflation, particularly when returns compound.

When interest rates lag behind inflation, savers can struggle to maintain the real value of their money. Naturally, investors have to be aware that volatility is par for the course, but, even after downturns such as the dotcom crash and financial crisis, equity returns still comfortably outperformed cash savings.

Asset mix

The role of bonds is also worth considering. Investors often hold a mix of assets to diversify on the hope that when one asset lags or falls, another picks up the slack. Bonds are IOUs issued by companies and governments: you lend them money for a fixed period and they pay you regular ‘coupon’ payments.

High inflation is bad for bonds. As prices rise, the spending power of the bond owner’s income reduces. This also affects their value. To make matters worse, higher inflation is normally accompanied with higher central bank rates, which leads to increased rates on newly issued bonds. Yesterday’s promise of 3% on a bond looks unattractive when new bonds are offering 5%. Again, this affects bond values.

Coupon payments

Some governments, and some companies, offer inflation-linked bonds. The coupon payments are linked to a particular inflation rate and so may rise. The pay-off is that the payments tend to be lower than would be available on traditional bonds. Examples of this include ‘TIPS’ in the US (Treasury Inflation Protected Securities) or index-linked gilts in the UK, often called ‘linkers’.

Some investors believe gold offers protection from inflation. This is partly because gold is regarded a store of value. Its supply is limited, unlike cash which can be created by central banks; the creation of cash can lead to the creation of inflation.


 

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INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

 

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Topics: Investment

Written by Chris Weetman on 15-Mar-2017 09:00:00

How to spread investment risk

Esmart Money

Holding different types of investments can help you reduce risk

One of the most effective ways to manage investment risk is to spread your money across a range of assets that, historically, have tended to perform differently in the same circumstances. This is called ‘diversification’.

In the most general sense, it can be summed up with this phrase: ‘Don’t put all of your eggs in one basket’. While that sentiment certainly captures the essence of the issue, it provides little guidance on the practical implications of the role diversification plays in a portfolio.

Minimising risk

While it cannot guarantee against losses, diversifying your portfolio effectively – holding a blend of assets to help you navigate the volatility of markets – is vital to achieving your long-term financial goals whilst minimising risk.

Although you can diversify within one asset class – for instance, by holding shares (or equities) in several companies that operate in different sectors – this will fail to insulate you from systemic risks, such as an international stock market volatility.

Further diversification

As well as investing across asset classes, you can further diversify by spreading your investments within asset classes. For instance, corporate bonds and government bonds can offer very different propositions, with the former tending to offer higher possible returns but with a higher risk of defaults, or bond repayments not being met by the issuer.

Similarly, the risk and return profiles of shares in younger companies in growth sectors like technology, for example, contrast with those of established, dividend-paying companies.

Portfolio insulation

Effective diversification is likely to also allocate investments across different countries and regions in order to help insulate your portfolio from local market crises or downturns. Markets around the world tend to perform differently day to day, reflecting short-term sentiment and long-term trends.

There is, however, the added danger of currency risk when investing in different countries, as the value of international currencies relative to each other changes all the time. Diversifying across assets valued in different currencies, or investing in so-called ‘hedged’ assets that look to minimise the impact from currency swings, should reduce the weakness of any one currency significantly decreasing the total value of your portfolio.

Individual investors

Achieving effective diversification across and within asset classes, regions and currencies can be difficult, however, and typically beyond the means of individual investors. For this reason, some people choose to invest in professionally managed funds that package up several assets, rather than building their own portfolio of individual investments.

Individual funds often focus on one asset class, and sometimes even one region, and therefore typically only offer limited diversification on their own. By investing in several funds, which between them cover a breadth of underlying assets, investors can create a more effectively diversified portfolio.

Multi-asset fund

One alternative is to invest in a multi-asset fund, which will hold a blend of different types of assets designed to offer immediate diversification with one single investment. Broadly speaking, their aim is to offer investors the prospect of less volatile returns by not relying on the fortunes of just one asset class.

Multi-asset funds are not all the same, however. Some aim for higher returns in exchange for assuming higher risk in their investments, while others are more defensive, and some focus on delivering an income rather than capital growth. Each fund will have its own objective and risk-return profile, and these will be reflected in the allocation of its investments – for instance, whether the fund is weighted more towards bonds or equities.


New Call-to-action

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

 

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Topics: Investment

Written by Chris Weetman on 08-Mar-2017 15:25:00

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