Vanguard has launched two special funds aimed at fresh-faced investors with over 40 years to go before they retire.
The fund giant claims a 25-year-old investing £100 per month could end up with around £135,000 after 40 years.
Called the Vanguard Target Retirement 2060 and 2065 funds, the age-based investments take more risk with investors’ money when they are young, but then become more conservative as they move towards the day when they need to cash in
Lifestyling has become a staple retirement strategy but it was devised in a environment where the main retirement income solution available to savers was an annuity
They slot into Vanguard’s suite of target-dated funds, which has now swelled to 11-strong with the new additions.
Such a strategy, also known as lifestyling, has become the default approach for many pension savers, but there is some debate over the merits of reducing investment risk as retirement approaches.
These funds aim to take decisions out of people’s hands by putting them into more risky investments when they are younger and can profit from greater growth, while having more time to ride out any storms.
As the point when they need their pot approaches they are shifted to less risky investments to avoid a big fall taking a heavy toll.
But should you choose a fund that offers this kind of easy-life investing, we take a look?
What’s on offer from the Vanguard lifestyle funds?
Both funds are for investors planning to retire in or within approximately five years after 2060 and 2065 and invest in Vanguard’s equity and bond index funds, as well as exchange traded funds.
That means that they provide an easy option for someone in their twenties or early thirties now – the so-called millennial generation – who want to get cracking on saving for retirement.
And the good news for those budding investors is that if they start now with even a small amount, then they will have a much better chance of a decent retirement pot in four decades’ time.
The funds are cheap, as they levy ongoing charges of just 0.24 per cent and can be invested via a tax efficient Isa or self invested personal pension.
Vanguard estimates that an individual investing £100 per month into one of its target data funds could end up with around £135,000 after 40 years.
This calculation factors in that ongoing charge of 0.24 per cent, and assumes a 5 per cent growth rate and an investment held on the Vanguard Personal Investor service which launched earlier this year.
James Norton, senior investment planner at Vanguard, said: ‘The UK public is facing an increasingly complicated route to retirement. Investors have more flexibility and choice, but they often face difficult decisions on how to save and invest in a rapidly changing pensions and investment environment.
‘Vanguard’s Target Retirement Funds are designed to help address these challenges, by offering a straightforward fund solution based on investment best practices and managed by experienced investment professionals.’
Investors can access the funds through Vanguard’s UK Personal Investor service, through other UK investment platforms, or via their financial advisers.
Reducing investment risk as retirement approaches may result might not be the best option for savers who intend to make full use of the pension freedoms
Why would you want one?
You might consider this product if you are thinking about saving for your retirement in your early twenties, which is a great time to get started as compounding will work its magic for you.
While many advisers would say that it is a sensible to save for retirement from a young age, the harsh reality is that many young people find it difficult to picture themselves so far into the future.
What they should realise, however, is that by saving a small sum now they can end up with a lot of money in the future, as compounding over the long term means that they make gains on gains.
Tax relief on their contributions and the potential for employers to match what they put in can also greatly magnify savings – this can turn £50 saved into £112.50 in a pension for a basic rate taxpayer.
One thing that has got younger people saving for pensions is auto-enrolment, as workers are now put into a pension by default and must then opt out.
Ryan Hughes, head of fund selection at investment platform AJ Bell. said: ‘Many young people live in the here and now and are more concerned about their short term financial needs than saving for retirement. There is often an emotional element when it comes to investing and savings. The challenge for providers is making young people want to care about saving for something that is so far out in the distant future.’
Is this kind of lifestyling fund any good?
Lifestyling has become a staple of retirement investing, but it was devised around the main source of pension income being an annuity – a product that is bought to provide an income for life.
But times have changed in the UK. The advent of the pension freedoms means that savers are no longer restricted to buying an annuity at retirement and can now use their nest egg as they wish, with a substantial number choosing to stay invested into retirement.
Many advisers suggest the best way to maximise income at retirement is to do this, keeping a pension pot invested and drawing on it for retirement income.
Those who go down this route potentially have an extra 20-year investment horizon once they reach retirement. Therefore target-dated funds that shed risks with the aim of delivering a cash pile at retirement date are not always the best solution for someone who intends to keep investing through pension freedoms.
On the flipside, they do deliver a sum of money that aims to be secured for retirement date, at which point people can then reassess their financial situation and make decisions about how they invest in retirement.
Research from Seven Investment Management (7IM) published earlier this year found the strategy of reducing investment risk as retirement approaches may result in millions of people running out of cash towards the end of their lives.
Should you change lifestyle retirement plans?
The idea of switching into less riskier assets typically cash and bonds as you approach retirement might sound like a good idea – and in some cases it is.
But there are concerns over the safe assets that people are shifted into, as these are typically government bonds.
he price of bonds and their yields move in opposite directions, so when prices are high, yields are low.
Almost a decade of super-low interest rates and central bank quantitative easing, which involved buying bonds on a huge scale, has driven up the price of bonds and pushed down the amount that they pay out, known as the yield.
Bond yields remain near record lows, with ten-year UK gilts paying just 1.31 per cent. As interest rates rise back towards more normal levels their is an expectation that bond prices will fall and yields will rise, this could reduce the value of people’s pensions that are heavily invested in bonds.
However, savers should always be aware that things change over time and that top quality government bonds are still considered a ‘safe’ investing asset.
Saver are strongly encouraged to seek professional financial advice before tweaking their plans.
The government has a free and impartial PensionWise service which offers guidance on pension matters for those approaching retirement.
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