Pensions — a question of risk assessment

Michael Owen, of Plan Invest, an independent financial adviser (IFA) based in Macclesfield, says that people should match their risks to their age. “Typically speaking, the nearer one is to retirement, the more careful one has to be,” he says. “If you are within five years of retirement, you should be thinking of protecting your capital. So you should be pulling money out of equities — say from 70 per cent to 50 per cent — and moving into bonds and maybe commercial property, which is generally perceived as less risky.

“If you are 15 years away from retirement, you can afford to take a more growth-orientated approach.”

Others are less ready to lay down hard-and-fast rules. Saran Allott-Davey, a financial planner, says: “The key is to focus on your time frame and forget about what fund happens to be flavour of the month. Put in the right assets depending on when you need the cash.”

For most of your life, those assets should be share-based, says Tom McPhail, a pensions expert at Hargreaves Lans-down, another IFA. “If you have at least ten years to go until retirement — and this is not immutable and it does depend on personal circumstances — you should have virtually all of your fund in equities. Within that, you can argue over the level of risk exposure,” he says.

Knowing your attitude to risk is vital, says Paul Bennett, of Money Doctor, an IFA based in Leicester. “We never suggest investments in equities for people who don’t want to take risk. We would choose building society accounts, cash Isas and, if willing, unit trusts utilising gilts.”

For a client between 50 and 65 he would recommend a portfolio of funds with a moderate risk profile. This would include 35 per cent shares, of which 5 per cent are overseas, 25 per cent property and

40 per cent in corporate bonds and gilts. A high proportion of this portfolio would be in low-risk funds, such as Merrill Lynch Cash, Old Mutual UK Money Market, Artemis Income, Invesco Perpetual Corporate Bond and M&G Gilt.

Mr Owen says that people with 30 years of saving ahead of them could afford to be more growth oriented. He would suggest four or five complementary investment styles for the UK equity component. They might include a blue chip fund, such as Schroder UK Alpha Plus, run by Richard Buxton, and an income fund, such as Standard Life’s UK Equity High Income, managed by Karen Robertson.

Lower down the market capitalisation scale, he likes AXA Framlington UK Smaller, managed by Roger Whiteoak, and Andy Brough’s Schroder UK Mid 250.

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For those prepared to take on more risk, investment trusts and direct shareholdings can make sense. Philip Milton, an IFA from Barnstaple, tips F&C Asset Management, a fund management subsidiary of Friends Provident, the insurance company — he thinks the latter will be bid for at some stage. Another is Edinburgh New Income. It has a good portfolio, he says, while the shares offer a healthy yield and stand at a discount to net asset value.

Graham Neale, of Killik & Co, the stockbroker, says that would-be retirees should also think beyond traditional investments, whatever their age. “At the moment, a lot of investors hold too many bonds, where yields are low, so it is important to think of property and absolute return-type assets,” he says. UK commercial property looks “fully priced” at the moment, but Mr Neale is tipping Develica Deutschland, a German-focused property fund, and is not afraid to suggest hedge funds.

He says: “Assessment of risk needs to be made with respect to the whole portfolio, so it is perfectly possible to hold a low-risk pension portfolio, but still include some higher-risk assets, such as some hedge funds.”

Killik has put some of its clients into “market neutral” hedge funds, such as Dexion Absolute, quoted in London, or Merrill Lynch UK Absolute Alpha. Such funds try to make “absolute” gains, perhaps aiming to achieve consistently a margin over bank interest rates.

“This is attractive in many cases because pension investors are often trying to achieve a return independent of the market,” Mr Neale says.

Whichever investment you choose for your personal pension fund, remember that shares have proven to be one of the few genuine hedges against inflation.

Setting up your own fund has never been cheaper

Once upon a time, putting together your own pension fund was the exclusive preserve of the rich or the self-employed. But changes in legislation and technology have brought self-selection within reach of the masses.

Self-invested personal pension funds (Sipps) have been around for quite a while, but the costs have come down only recently. Malcolm Cuthbert, of Killik & Co, the stockbroker, says: “A few years ago you would have faced set-up costs of £600 to £700 and an annual fee. Now a lot of Sipps make no initial charge and an annual charge of about £100 — and that’s where it becomes worthwhile to do your own thing.”

Sipps will give you the tax breaks of a pension while allowing a wide choice of investments. Although assets such as wine, racehorses and residential property are excluded, that still leaves everything from mainstream shares and funds to more specialist assets, such as contracts for difference and commercial property.

At one end of the spectrum, Hargreaves Lansdown’s no-frills Vantage Sipp has no initial or annual charges and offers discounts on 1,300 investment funds. But it does not allow direct investment in commercial property. Killik’s FlexiSIPP will, but it charges more for dealing to cover the provision of advice. And you will pay even more at bespoke providers, such as James Hay.

For those with small sums who want to keep it simple, a stakeholder pension, which caps charges at 1.5 per cent, can still be good value.

Tom McPhail, of Hargreaves Lansdown, recommends Newton Managed Fund through Scottish Widows or an AXA Retirement Distribution fund.

For more on pensions visit www.timesonline.co.uk/pensions