Are gilts and bonds still a good bet for pension funds?

Hi,

I’ll be 65 this year and will be retiring. My defined contribution pension fund has followed a ‘lifestyle’ plan and is 90% gilts and bonds and 10% cash. Following the Liz Truss budget, my fund suffered a 40% reduction in value and while it has recovered somewhat, it is still 30% below the value it once had. I am thinking of delaying taking this pension to give it time to recover. However, as its value has not really increased over the last couple of years, I’m wondering if I should move some or all of my funds back into stocks and shares.

Is this a wise plan?

Thank you

Hi,

Interestingly, while Lifestyle plans faced significant challenges in recent years (particularly for those nearing retirement), they now appear to be a reasonable option moving forward. Mainly for those who prefer not to receive ongoing financial advice or actively manage their pension investments but still require a degree of automation.

This situation, however, highlights the recent shortcomings of Lifestyle funds in protecting investors approaching retirement. By relying on traditional risk measures like historic volatility alone, and not accounting for the complexity of modern investment environments, these funds have, in many instances, failed to deliver their intended purpose.

Currently, gilts and bonds (fixed-interest investments) offer a compelling opportunity. For example, 10-year gilts are yielding approximately 4.72%, effectively guaranteeing an annual income of 4.72% if held to maturity. Additionally, because fixed-interest securities have an inverse relationship with interest rates, any future rate reductions could increase their capital value. From a risk-reward perspective, this makes them an attractive option compared to equities in the current environment.

While equities potentially offer higher returns, this comes with increased risk in the short-term. However, deciding to move investments into equities requires careful consideration of one’s individual circumstances.

Key questions you could reflect on include:

• Has your appetite for risk genuinely increased? If so, why?
• Has your capacity for capital loss improved?
• Is your investment time horizon long enough (e.g., more than five years) to justify increased equity exposure?
• What are your specific retirement objectives, and does your pension fund align with them?

Conducting cash flow planning can help assess whether your pension fund will be sufficient to meet your retirement needs.

If your appetite for risk has grown but your capacity for loss or investment time frame has not, moving into equities may not be appropriate. Or, if your pension fund is already stretched and your time horizon remains short, the risks of a market downturn combined with moving assets into equities would not likely be a prudent decision.

I hope you find these pointers helpful!