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Fidelity challenges pension providers


Fidelity Retirement Income Fund

Type: Oeic fund of funds

Aim: Income by investing in bonds, equities, property securities and commodities mainly through Fidelity funds

Minimum investment: Lump sum £1,000, monthly £50

Investment split: 100% in a portfolio of bonds, equities, property securities and commodities mainly through Fidelity funds

Isa link: Yes

Pep transfers: Yes

Charges: Initial 3.5%, annual 1.25%

Commission: Initial 3%, renewal 0.5%

Tel: 0800 414181

Investors in retirement, or close to it, can invest in the Fidelity retirement income fund without the need to invest in the retirement funds. It is designed to provide a sustainable income for life, with the potential to rise over time in line with inflation. Unlike pensions, investors have access to their capital at any time and can pass on any remaining assets to their families.

Arch Financial Planning director Arthur Childs says: “Fidelity has hailed this as a fresh approach to retirement savings and I feel that this is something it has achieved. It should not be used to replace employer sponsored or private pension schemes, although the fund could be used to good effect within a Sipp.”

Childs says advisers have suggested a twin approach to building up retirement funds through both pensions and other investments. He thinks Fidelity has turned the “other investments” approach into a simple and effective process. “The fund is useful in the post A-Day environment when funds can be built up outside pensions and moved across into pension funds with full tax relief, later in life if appropriate,” he says.

According to Childs, the removal of tax-free dividend income from pension funds created a more level playing field for alternative pension funding vehicles. “If the tax-free cash sum eventually goes, not just in name but in practice, this sort of fund will surely become the norm for most people’s retirement funding. Investors increasingly want to control their investments and their retirement fund is no exception,” he says.

Childs observes that the investment strategy is modelled on funds in the US, where Fidelity is the biggest provider of lifestyle retirement investing, having attracted over $68bn from over 3m investors since 1996. “Lest we think we have little to learn from the US on pensions, we only have to consider the current mess the average UK baby boomer is said to be in over their potential retirement income. On the other hand, the US third annual Retirement Index has recently found that the typical working American household is on track to replace 58 per cent of their income in retirement,” he says.

Childs points out that people can build up an investment portfolio during their working lives through six fettered funds of funds with target dates at five-year intervals between 2015 and 2040.

“Having reached the target date, the funds are then switched into Fidelity’s new retirement income fund which allows a flexible income to be drawn but it is not necessary to take an income straight away. The fund can be left to continue to grow but with a low level of risk,” he says.

Due to the funds’ target dates, the manager knows when an investor wants to retire and manages the fund accordingly. Childs points out that the funds’ asset allocation will be regularly reviewed and when the target date is reached, the investor is given the optimum balance of investments to generate an income that aims to keep pace with inflation. this is followed by the opportunity to pass on assets to their family.

“In effect, the Fidelity retirement income fund aims to match the sort of payouts that new retirees might expect from an index-linked annuity but without having to sacrifice their capital. On death, any remaining assets will be included in the individual’s estate and passed on to their heirs,” he says.
Income withdrawal can be stopped, started, and the level can be changed, as can the frequency of payment. “Fidelity recommends a 4 per cent withdrawal rate because analysis suggests that this gives investors relatively stable payouts with good prospects of their investment lasting their lifetime.

Fidelity intends to launch a monthly distributing share class of the fund later this year which is again expected to be at around 4 per cent a year,” he says.
According to Childs, the funds provide a focal point for advisers to tidy up clients’ piecemeal ‘non-pension’ retirement savings that may have accumulated in Isas, Peps or deposit accounts. “As investors can buy, sell or switch at any time, for example to funds with different target dates, flexibility and control over retirement funding is maintained,” he says.

In Childs’ view, Fidelity has rightly identified a potential additional benefit in that in later retirement the fund could be used to fund care fees as there is no maximum withdrawal, and in some cases avoiding the need to sell the family home. He feels the charges are attractive, while the commission is standard.
“The literature, both for investors and IFAs, is particularly attractive and easy to read. There is a special retirement website which includes a new online calculator which shows investors how big their retirement pot needs to be and how close they are to achieving their goal,” says Childs.

Considering the potential drawbacks of the fund Childs says: “Innovation such as this should be encouraged and there is little to dislike about the product. I suppose my main concern would be that the ease of access may be the downfall of this retirement funding approach for many people.

“I am slightly surprised that Fidelity has not made more of the possible tax planning advantages of using this fund to equalise estates in retirement for tax planning purposes, avoiding the age allowance trap, and seeking to mitigate against inheritance tax by putting the fund in trust.”

Looking at the products that could compete with Fidelity Childs says there is a range of personal and stakeholder pension plans with their attaching tax relief benefits. “Over a very long contribution period the additional fund produced by the roll up of these tax reliefs is substantial. However, where the contribution period is less than 15 to 20 years the effect of initial tax relief is less important, bearing in mind that tax has to be paid on pension income.”

In his view, the only comparable product is provided by IFA firms who offer an ongoing service to their pension clients through the funding years and into their retirement years. “However, few firms are big enough and stable enough to promise a service years, let alone decades, into the future,” he says.

Summing up Childs says: “Pension providers should be in no doubt that they face serious competition for their contribution income from these new funds,”


Suitability to market: Good
Investment strategy: Good
Charges: Good
Adviser remuneration: Average

Overall 9/10


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