/ 19 October 2011

Is life stage modelling a good pension fund option?

What is the best pension fund option to get?

Vaneshen asks: My company pension fund wants us to choose between the Alexander Forbes life stage model controlled by Alexander Forbes and Investment Solutions or the balanced single fund manager for the high growth portfolio from Coronation Fund Managers. From my understanding the life stage model will invest me in a high growth portfolio and will change as I near retirement. Which would be a better option for me and what are the pros and cons of each of them?

Maya replies: There is a great deal of debate around life stage modelling. The pro is that you do not have to worry about how your money is invested as the asset allocation will be adjusted as you get older to reduce your risk and to prepare you for retirement. The con is that it does not take your personal circumstances into account.

For example you may not want to be sitting in a high weighting of cash and bonds near retirement. A person who has other discretionary savings or perhaps continues to work after retirement may not need to draw an income for a further five or 10 years and may still want a higher exposure to equities.

A person may want to select a living annuity with exposure to growth asset classes like equities and property to generate both income and capital growth during their retirement.

Ideally one should be more actively involved in your retirement planning, especially once you are 10 years from retirement. At that stage you need to sit down and understand what your retirement provision is and what your personal plans are, and then adjust your investments accordingly.

For people who are not going to have the discipline to do this, a life stage model is a good default as it protects them from losing money in a volatile market prior to retirement.

There are two things you need to find out. What is difference in fees between the two options and how flexible is the life stage model?