Since the dawn of pension freedoms and the
ability for those in defined benefit schemes to transfer their funds into a
defined contribution arrangement, a record number of transfers have occurred.
Taking the decision to move out of a guaranteed
income scheme to one which is reliant on stock market performance isn’t a
decision to be taken lightly.
However, if the advice is to transfer, as
it will meet your objectives better, the next step is to find a home for the
If you’ve taken advice to transfer (transfer
value above £30,000) your adviser will have taken you through a risk profiling
exercise. There are no right or wrong answers with where you fit on this risk scale,
but your situation should be able to tolerate the resulting volatility.
Recent data from Selectapension (adviser
transfer software provider), provides an insight into where the majority of
these funds have been placed, since pension freedoms began.
At the top of the list is PruFunds provided
by Prudential. The two main funds are PruFund Growth and PruFund Cautious, with
a risk level of around 4 and 3 out of 10 respectively. These are cautious/balanced
funds by nature and have given consistent performance for the last 10 years.
A reason these may be popular is because of
their ‘smoothed’ returns. So, while a standard fund will move in tandem with
the stock market rising and falling ever day, the PruFunds aim to smooth out this
volatility by providing a more consistent return.
When markets increase significantly, this
rise isn’t added to the underlying fund performance. Instead some of the profits
are held back so when the market dips, this additional growth held back can be
put back on, creating a more consistent return.
In total, around 13,500 defined benefit members
have used PruFunds since the pension freedoms. It seems people are looking for
a more consistent return in retirement, in order to manage income, than chasing
larger returns, which comes with more volatility.
PruFund currently has around $40 billion of
assets and it seems will continue to grow given its consistent performance. PruFund
Growth has delivered 33.97% whilst PruFund Cautious has delivered 19.75% since
pension freedoms began.
Other funds which are popular include Vanguard, who provide lower-cost passive funds. There has been a definite shift from traditional actively managed funds to passives given the management charge cost saving. This has been helped by passive funds, which replicate an index as a whole, outperforming many actively managed funds. The view is why pay more in management charges when the performance doesn’t justify it.
In terms of sector specific funds, the US has been the stand out region. Schroders US mid Cap, Merian North America and Vanguard US Equity Index have shown returns or 50%, 62.95% and 59.14% respectively since pension freedoms began.
As always, past performance is not guide to future performance and the above popular funds may not continue to perform in the future. This isn’t a recommendation.
Learn about: What affects Defined Benefit transfer Values?
Are you considering transferring your defined benefit scheme? Ask me a question.