Your guide to the investment changes

Transcription

1 Your guide to the investment changes This announcement sets out changes to both the Lifecycle Strategy and Freechoice fund range. Please read it carefully. A quick reminder of how the Scheme works Every month you and the Company pay money (contributions) into your Personal Account. The Government also helps you save by providing you with tax relief on your contributions. To help your savings grow, you choose where to invest your Personal Account from a range of investment options. Some technical terms are used in this announcement these are explained on the back page. There are two different types of investment options in the Scheme: 1. Lifecycle Strategy: An investment option for members who do not want to select their own investment funds. This is currently the default it s where we invest your Personal Account if you don t confirm where you want it to be invested. The current Lifecycle Strategy or default (now known as the Annuity Lifecycle Strategy ) assumes members will take an annuity in retirement. 2. Freechoice funds (sometimes referred to as self-select funds): A range of investment funds for members who prefer to choose where they invest their Personal Accounts. Invested in the Lifecycle Strategy? Go to page 2 for further details about the changes that affect you. Invested in one of the Freechoice funds? We re making some changes you should read about. For more details go to page 4. If you invest in the Lifecycle Strategy there are other things you need to consider. We ve included an additional leaflet in this pack for you please read it. What is an annuity? An insurance policy you can buy when you retire using the money in your Personal Account. It pays an income for the rest of your life. December 14

2 What are the Lifecycle Strategy changes and how do they affect me? Introducing a new Drawdown Lifecycle Strategy The current Lifecycle Strategy (now known as the Annuity Lifecycle Strategy ) will no longer be the default. It will still be available but a new Drawdown Lifecycle Strategy will become the default. What is the Drawdown Lifecycle Strategy? The new Drawdown Lifecycle Strategy is designed for members who wish to take income drawdown when they retire. With income drawdown: you transfer your Personal Account to another pension provider outside the AXA UK Group Pension Scheme ( the Scheme )*; start withdrawing a retirement income from it; and the rest of your money remains invested. So for the last few years your Personal Account is invested in the Scheme, part of it is invested in funds that are likely to provide some long-term growth as well as some stability in value. Why are we replacing the current default Lifecycle Strategy? The current default: assumes you will take an annuity when you retire; and invests your Personal Account in bonds and cash funds closer to retirement. These investments help protect its buying power. With the new retirement flexibilities announced in the 14 Budget (see the box to the right); the Trustees believe members may want to take some form of income drawdown, instead of just buying an annuity. The charts below show how the different strategies invest years before you retire. Before then they invest in the same funds equities (which have a potential for higher returns), then a diversified growth fund. How things worked before the 14 Budget Before the 14 Budget, for most members the choices at retirement were limited. You could either: use your entire Personal Account to buy an annuity; or take up to 25% of your Personal Account as a tax-free cash lump sum and use the balance to buy a smaller annuity. If you had very large retirement benefits, you could transfer your Personal Account to another pension arrangement and then start withdrawing a retirement income from it, while keeping the rest invested known as income drawdown. What did the 14 Budget change? From April 15, buying an annuity when you retire is optional. Broadly speaking you also have the following options (regardless of the size of your Personal Account): Take your entire Personal Account as cash. 25% is tax-free and the rest is taxed at your marginal rate of income tax. Transfer your Personal Account to another pension arrangement and start withdrawing a retirement income from it while keeping the rest invested income drawdown. Drawdown Lifecycle Strategy Annuity Lifecycle Strategy Allocation % to Years to retirement 5 0 Allocation % to Years to retirement 5 0 Global Equity Passive Fund Diversified Growth Active Fund Absolute Return Bond Fund UK Corporate Bonds Passive UK Long Gilts Passive Fund Cash Active Fund *We re reviewing this and will let you know if this changes in the future. 2

3 What do I need to do? Nothing. We will automatically invest your Personal Account in the Drawdown Lifecycle Strategy in February 15. If you want us to keep you in the Annuity Lifecycle Strategy, you need to complete a form see page 5 for details. Will this cost me anything? We believe the changes we re making will benefit members in the long term. However, there will be a transaction cost to transfer your Personal Account to the Drawdown Lifecycle Strategy, which will be taken directly from your Personal Account. A similar cost could apply if you remain in the Annuity Lifecycle Strategy because we re making some changes to it (see below). What other changes are we making to the Lifecycle Strategies? As you can see in the charts on page 2, both Lifecycle Strategies invest in the Diversified Growth Active Fund. If you re in a Lifecycle Strategy, we will now only start investing your Personal Account in the Diversified Growth Active Fund 25 years before you re due to retire. Before then we will invest 0% of your Personal Account in the Passive Global Equity Fund. Allocation % Why are we making this change? It s important to give your Personal Account the best chance to grow in the earlier stages of the Lifecycle Strategy. We believe the Passive Global Equity Fund gives you the best opportunity for this. While it has more potential to change in value than the Diversified Growth Active Fund, we believe during the earlier stages of the Lifecycle Strategy: you have more time to ride out any ups and downs; and potentially increase the value of your Personal Account more significantly. How we used to invest your Personal Account We used to initially invest: 50% of your Personal Account in the Passive Global Equity Fund. 50% of your Personal Account in the Diversified Growth Active Fund. As shown in the chart below: to 15 Years to retirement 5 0 Global Equity Passive Fund Diversified Growth Active Fund UK Long Gilts Passive Fund Cash Active Fund UK Corporate Bonds Passive Note: At the moment, the Diversified Growth Active Fund invests in Schroders Life Intermediated Diversified Growth Fund. We have agreed instead to invest it in: Schroders Dynamic Multi-Asset Fund (DMAF); and Invesco Perpetual Global Targeted Returns Fund. We believe that these funds are better suited to members needs because they: Have been developed for Defined Contribution schemes like ours. Invest in a more diverse mix of funds. Offer members a lower management charge a Total Expense Ratio (TER) of 0.73% a year compared with 0.88% a year (as at 30 June 14). 3

4 Freechoice funds the changes in detail Expanding the Freechoice range We are introducing the following funds to our Freechoice range: Fund name Emerging Markets Fund Property Fund Absolute Return Bond Fund* Description This fund invests in listed shares in emerging market countries. This fund invests in a range of different types of property funds. This fund invests in a range of global debt instruments from AAA government bonds to high yield and emerging market bonds. * This fund will be used in the new Drawdown Lifecycle Strategy. Full details including the level of risk associated to each fund are included in the Investment Guide available at Changes to existing funds We have agreed to make changes (which we believe are improvements) to two of our existing Freechoice funds. We explain below: Socially Responsible Investment (SRI) Fund This fund currently invests in the Jupiter Ecology Fund (an actively managed fund). As part of our review, we have agreed the Jupiter Ecology Fund should be replaced with the LGIM Ethical Global Equity Fund (a passively managed fund). We believe that it is more suited to members needs because: It invests in a more diverse mix of shares, which means it is less likely to change in value. It s a passively managed fund which will also reduce the risk that it doesn t perform well against its benchmark. It offers members lower management charges 0.48% a year, compared with 0.98% a year*. Diversified Growth Active Fund In keeping with the Lifecycle Strategies, we believe the updated Diversified Growth Active Fund also offers better value for members investing in Freechoice funds. We will make the same changes: Replace: With: Schroders Life Intermediated Diversified Growth Fund. Schroders Dynamic Multi-Asset Fund (DMAF); and Invesco Perpetual Global Targeted Returns Fund. We don t expect these changes to have a material impact for anyone who is invested in either fund. If you feel these are no longer appropriate for you, change your investment choices online by logging into * These percentages are based on Total Expense Ratio (TER) as at 30 June 14 see the jargon buster on the back page. 4

5 Your decisions and next steps Members invested in the Lifecycle Strategy If you invest in the Lifecycle Strategy (currently the default option): We will automatically invest your Personal Account in the Drawdown Lifecycle Strategy in February 15. If you wish to remain in the Annuity Lifecycle Strategy please request the Annuity Lifecycle Strategy Opt In form from the Scheme Administrator BlackRock (contact details below). You must complete and return it by 30 January 15. Members invested in one of the Freechoice funds You don t need to do anything. However, it s important to review your investments to make sure they re still appropriate for you. If you decide you want to invest in a different fund you can let us know by logging on to You will not be able to access your Personal Account in February 15 while we make the changes to the Lifecycle Strategies. Scheme Administrator and other resources Address: BlackRock Employee Savings Service Centre PO Box 705 Peterborough PE1 1ZL Tel: [email protected] Website: For information about the Scheme and tools such as the investment guide and retirement options guide. This money advice website provided by the Government offers impartial information on pensions. The Pensions Advisory Service offers free independent guidance on your retirement options. You ll find a range of resources on their website. You can also call them on If you re still unclear which investment option is best for you, consider seeking financial advice. It s a big decision. You can find a list of financial advisers in your area on this website. 5

6 Your guide to pensions jargon Actively managed fund A fund where an investment manager attempts to produce returns that are higher than the benchmark (such as the FTSE 0 Index). But there is also a risk that their returns could fail to match the benchmark. Annuity An insurance policy you can buy when you retire using the money in your Personal Account. It pays an income for the rest of your life. Benchmark A standard an investment fund s performance is measured against typically a market index like the FTSE 0. Bonds Loans issued by companies, banks and large organisations. At a specified date the owner of the loan is paid a fixed amount of money. A rate of interest is usually paid on the money loaned. UK Government bonds are called gilts. Defined contribution scheme In this type of scheme you and the Company pay contributions into a Personal Account held for you. Your retirement income depends on: how much you and the Company have paid in; where you choose to invest the money paid in and the performance of your investments; and your age when you retire. Diversified growth fund A diversified growth fund: aims for high returns by investing in funds like equities; but balances this by also investing in funds which aren t expected to go up or down as much in value. Equities Shares in companies. The holders of the shares in a company together own the business and receive a payment from the profits of the business. Freechoice fund A range of different investment funds for members who prefer to choose where their Personal Account is invested. You monitor their performance and decide to switch funds when you like. Income drawdown Under income drawdown, each year you withdraw a retirement income from a pension arrangement and leave the rest invested. You have the flexibility to take out as much money as you like each year. Lifecycle Strategy A Lifecycle Strategy automatically invests in higher risk funds at first and gradually moves you to lower risk funds the closer you get to retirement. Passively managed fund A fund where the investment manager aims to achieve a return that is close to a chosen benchmark, for example the FTSE 0. Unlike an active fund manager who will seek to outperform the index. Total Expense Ratio (TER) The cost associated with managing and operating an investment fund including investment management fees and other operational expenses.