Question
I am 58 and have a lifestyle pension (paidup) with Aegon. They have switched this into long gilts and more stable funds preparing for my retirement at 65.
They have stated they do not have a fact sheet showing what monies are in what funds etc but Aegon long gilt fact sheet states it is a low risk to other funds but more sensitive to market fluctuations?
I do not understand this aspect and feel that I should be in a more aggressive fund for some years yet.
Can you please shed some light.Answer
A long gilt fund invests in UK government gilts with maturity dates of at least 15 years away. To help explain why they’re more sensitive to market movements than gilts maturing sooner, let’s look at what affects their value.
The value of fixed interest investments, such as gilts and corporate bonds, tends to be most influenced by interest rates, inflation and the likelihood the borrower will repay your interest and loan at maturity.
Rising interest rates are bad news because gilts, which pay a fixed rate of interest, will look less attractive by comparison. Rising inflation is also bad news because it means future income payments and your loan, when returned at maturity, will buy increasingly less in future compared to today. In both cases you’d want to pay less for the gilt, pushing down its price.
Timescale matters too; the longer the period to maturity, the greater the impact of interest rate and inflationary changes. Suppose you own two gilts, one maturing next year and the other in 20 years. If interest rates rise then you’ll lose out on the one year gilt, but at least you’ll get your money back next year allowing you to earn higher interest elsewhere. Whereas you’re stuck with the other gilt and could continue losing out for another 20 years – therefore its price will fall by more. The scenario would be similar for inflation too.
[note: the amount of income paid by the gilt matters too (forms part of a measure called ‘duration’ that predicts a bond’s sensitivity to interest rate changes), but I’ve ignored here to keep the example simple].
Actual performance over the past year reflects this. The Aegon (Scottish Equitable) Long Gilt fund fell by around 8%, largely due to fears over rising inflation/interest rates and the Government’s soaring debts, whereas short gilt funds fell by around 1%.
The reason insurers tend to suggest long gilt funds when you’re approaching retirement is that in theory they help protect your annuity purchase as they buy long dated gilts to pay annuity income. If gilts fall in price then while your pension fund will suffer you should get a better annuity rate to compensate (and vice-versa).
Is this too conservative given you’re still seven years from retirement? There’s no right or wrong answer, it really depends on how much risk you’re comfortable taking. If you don’t mind volatility and have other sources of income that might allow you to delay taking the pension beyond age 65 (if markets are unfavourable at that time) then by all means consider more adventurous investments such as corporate bonds, property and global stockmarkets. Nevertheless, in these very uncertain times I wouldn’t try to be overly speculative and it would still make sense to move progressively towards cash and gilts as you near 65.
I am 58 and have a lifestyle pension (paidup) with Aegon. They have switched this into long gilts and more stable funds preparing for my retirement at 65.
They have stated they do not have a fact sheet showing what monies are in what funds etc but Aegon long gilt fact sheet states it is a low risk to other funds but more sensitive to market fluctuations?
I do not understand this aspect and feel that I should be in a more aggressive fund for some years yet.
Can you please shed some light.Answer
A long gilt fund invests in UK government gilts with maturity dates of at least 15 years away. To help explain why they’re more sensitive to market movements than gilts maturing sooner, let’s look at what affects their value.
The value of fixed interest investments, such as gilts and corporate bonds, tends to be most influenced by interest rates, inflation and the likelihood the borrower will repay your interest and loan at maturity.
Rising interest rates are bad news because gilts, which pay a fixed rate of interest, will look less attractive by comparison. Rising inflation is also bad news because it means future income payments and your loan, when returned at maturity, will buy increasingly less in future compared to today. In both cases you’d want to pay less for the gilt, pushing down its price.
Timescale matters too; the longer the period to maturity, the greater the impact of interest rate and inflationary changes. Suppose you own two gilts, one maturing next year and the other in 20 years. If interest rates rise then you’ll lose out on the one year gilt, but at least you’ll get your money back next year allowing you to earn higher interest elsewhere. Whereas you’re stuck with the other gilt and could continue losing out for another 20 years – therefore its price will fall by more. The scenario would be similar for inflation too.
[note: the amount of income paid by the gilt matters too (forms part of a measure called ‘duration’ that predicts a bond’s sensitivity to interest rate changes), but I’ve ignored here to keep the example simple].
Actual performance over the past year reflects this. The Aegon (Scottish Equitable) Long Gilt fund fell by around 8%, largely due to fears over rising inflation/interest rates and the Government’s soaring debts, whereas short gilt funds fell by around 1%.
The reason insurers tend to suggest long gilt funds when you’re approaching retirement is that in theory they help protect your annuity purchase as they buy long dated gilts to pay annuity income. If gilts fall in price then while your pension fund will suffer you should get a better annuity rate to compensate (and vice-versa).
Is this too conservative given you’re still seven years from retirement? There’s no right or wrong answer, it really depends on how much risk you’re comfortable taking. If you don’t mind volatility and have other sources of income that might allow you to delay taking the pension beyond age 65 (if markets are unfavourable at that time) then by all means consider more adventurous investments such as corporate bonds, property and global stockmarkets. Nevertheless, in these very uncertain times I wouldn’t try to be overly speculative and it would still make sense to move progressively towards cash and gilts as you near 65.
Read this Q and A at http://www.candidmoney.com/questions/question161.aspx
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