Retirees in Britain’s dramatically changed at-retirement market face years of losses in a market downturn due to their investment holdings, Aegon has warned.
Research by the insurance and pensions provider found that many people drawing their pensions since the UK introduced its ‘pensions freedom’ rules two years ago, were sticking with “familiar” investment strategies and well-known funds.
Using data from its own platform, the firm found little difference between investment strategies used by pensions ‘drawdown’ customers and those that had opted to continue investing for a pension.
Drawdown investors have different demands on their money and shorter timeframes, meaning strategies should differ.
Yet flows by drawdown customers – which were mainly for multi-asset strategies followed by equity growth funds, bond funds and equity income funds – largely mirrored the asset holdings of non-drawdown customers, Aegon’s research showed.
Nick Dixon, investment director at Aegon, said retirees’ investment choices favoured tried-and-tested brands and investment strategies over newer, more tailored options.
“As a result, there is a mis-match between the long-term growth objectives of many of the strategies being used, and the near-term income needs of retirees who use them. Retirees are also now more exposed to market highs and lows than they have ever been.”
The strategies used have not yet been tested by a market shock similar to the dotcom burst or credit crunch, Dixon said.
“Our hope is that the market evolves further before one occurs,” said Dixon.
The research did note that investors had reduced risk in their multi-asset funds, but Dixon suggested funds that offer a guaranteed income for life may also be appropriate.
Pension freedoms gave retirees more choices than simply buying an annuity when they reach retirement.
Aegon said drawdown has become the most popular option for retirees, growing from 15% of retirement income sales in the third quarter (Q3) of 2013, up to nearly half by Q3 last year.
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