For information only: please note this is not a recommendation or investment advice. You should ensure that any investment decisions you make are suitable for your personal circumstances.
What are target retirement funds?
Target retirement funds provide a ready-made portfolio that is geared towards growing your wealth in the early years and protecting it as your retirement draws closer.
This is achieved by gradually moving your money from higher risk investments into lower risk investments over time.
The idea is that this locks in gains that you have made during your working life and prevents you losing money if the stock market falls in the run up to your planned retirement.
You might also see target retirement funds referred to as target date funds (TDFs).
How do target retirement funds work?
Target retirement funds will invest in a diversified portfolio of shares and bonds.
At the outset the portfolio will predominantly be invested in shares – this is because they offer greater growth potential. Although they carry more risk, the length of your investment horizon should give you enough time to ride out any volatility.
But as your retirement draws closer, more of your money will be moved over to lower risk bonds. This will help preserve the returns you have made so far and shelter your pension from a stock market slump that you might not have time to recover from.
You might hear this process referred to as the ‘glide path’ for your pension.
At the start of your plan, your target retirement fund is likely to be around 80% in shares and 20% in bonds but in the year you retire, you can expect a 50/50 split.
Target Retirement Funds available with ii
Here is the list of Target Retirement Funds available on the ii platform.
Vanguard Target Retirement Funds
Vanguard Target Retirement Funds make investing for retirement simple. The funds are designed to take more risk in the early stages of investment to generate returns, and reduce risk as you approach retirement and start making pension withdrawals.
BlackRock LifePath Target Retirement Funds
BlackRock's LifePath Target Retirement Funds seek to provide a diversified investment that balances between growing your investment and protecting against risk to help you advance toward your retirement goals.
What’s the difference between a target retirement fund and a lifestyle fund?
When you save for retirement in certain personal or workplace pensions, the scheme may employ a lifestyle strategy. This normally happens if you don’t make an active investment choice when you take out the pension and your money is invested in the default option.
With this strategy the asset allocation of your investment changes automatically, to reduce risk as your retirement approaches.
Lifestyling and default funds are not available with SIPPs. However, target retirement funds give investors in SIPPs the opportunity to invest in a fund that will automatically ‘de-risk’ on their behalf.
Target retirement funds may be more sophisticated than some lifestyle strategies and use only one fund, but the overall goal of both is the same.
How to choose a target retirement fund
When you invest in a target retirement fund, you’ll have to select the one with the target date that is closest to your anticipated retirement.
Funds are likely to be offered in five-year intervals. So if you’re planning to retire in 2051, you’d normally go for a fund with a target date of 2050.
Although target retirement funds are widespread in the US, they are also growing in popularity in the UK.
Why choose a target retirement fund?
A target retirement fund might be appealing if you do not want to worry about how to de-risk your portfolio as your retirement approaches. Sometimes people think of them as ‘set and forget funds’ – once you’ve taken out your plan you can put your feet up and forget about your pension.
However, while they might seem like an easy option, their approach may prove too cautious for those that wish to remain invested and carrying on growing their wealth into retirement.
What to consider before investing in a target retirement fund
Before you invest in a target retirement fund, it’s important to consider the pros and the cons. You will also need to think about how you plan to manage your income once you retire.
Pros of target retirement funds
- Your money is automatically moved into lower risk assets as retirement approaches.
- Your money is invested in a well-diversified portfolio of shares and bonds.
- The only decision you need to make is what year you want to retire.
- Charges should be low.
- They may suit savers wanting to purchase an annuity when they retire, this is because they’ll need to protect the lump sum needed to buy it.
Cons of target retirement funds
- The asset allocation (the share/bond split) is determined by your target retirement date, your fund manager may not be able to react to market changes.
- If you want to remain invested during your retirement, you may not want to de-risk your portfolio to the extent it would be with a target retirement fund. The approach may be too conservative for you and you might prefer to hold more shares to carry on delivering some growth.
- You may become disengaged from your pensions investing.
- You don’t have any control over your investments.
Target retirement funds and de-risking
It’s important to consider the extent to which you need to remove risk from your investments. Capital preservation will be most important to those that are planning to buy an annuity. If you are likely to keep your pension invested through retirement (using flexi-access drawdown) it may not make sense to put too much of a brake on investment growth.
Maintaining strong equity exposure in the run-up to (and during) retirement can increase your income over time and provide a useful hedge against inflation. If too much of your money is invested in bonds you may not get the level of growth that you need.
Should I only invest in a target retirement fund, or should I invest in other funds alongside it?
Target retirement funds are designed as core holdings, removing the need for you to manage a portfolio of funds. That said, there is nothing to stop you investing in other funds alongside it.
At retirement can target retirement funds pay an income?
As long as you are holding your target retirement fund in a SIPP, you will have the same options as any other SIPP investor when you reach the age of 55 (rising to 57 in 2028).
This means you can take lump sums (uncrystallised pension fund lump sums), or tax-free cash lump sums (pension commencement lump sums) when you crystallise your pot.
If you want income you can leave your pension invested and go into flexi-access drawdown and make withdrawals as and when required. You can either stick with you target retirement fund or choose other investments, depending on your needs and preferences.
Alternatively, if you do not want to remain invested you can use some or all of your pot to buy an annuity that pays an income for life.
Target retirement funds FAQs
How can Pension Wise help?
If you have a defined contribution pension scheme and are 50 or over, then you can access free, impartial guidance on your pension options by booking a face to face or telephone appointment with Pension Wise, a service from MoneyHelper.
If you are under 50, you can still access free, impartial help and information about your pensions from MoneyHelper.
Learn more about our SIPP
Learn how to make the most of your SIPP with our useful guides.