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Unit Linked Pension Fund/Plan
A unit linked pension is a type of pension plan where contributions are used to buy ‘units’ in a pooled fund or funds. There are a variety of investment funds available with this type of pension, and such funds are categorised together in sectors to represent the style, area and risk level in which the providers of the pension fund or where proactive, the savers, have decided to invest.
The value of the individual units can fall as well as rise over the period of investment. Therefore, care is taken to spread the risk by various means in order to provide the best return whilst ensuring that funds are still wisely invested.
Lifetime of the Investment
At any time during the lifetime of the investment, the majority of unit linked pension plan providers will permit the switching of funds for risk management purposes. This is important as it is common practice to switch to less risky funds as the chosen date for retirement approaches; at this point riskier funds are viewed as less attractive than those that are more cautious. Prudent investment decisions often mean that towards the end of the investment period, the fund is usually moved to a fixed investment where the returns are lower but generally guaranteed.
Four Types
There are four main types of unit linked investment funds available to prospective policyholders. Unit linked investment funds are considered as normally carrying greater risk than with profits pension funds because the value of the fund fluctuates in line with the investments that underlie the units purchased with contributions. Nonetheless, the returns can be more impressive than with profits pension funds in the long term. The main types of unit linked funds are:
Managed funds
Unlike specialist funds (see below), these popular unit linked funds invest in a mixture of UK and overseas shares, property, fixed interest securities and cash deposits. Here, an investment manager’s role is to monitor and adjust the balance between the various assets to ensure an appropriate exposure to risk as investment conditions change. There are companies that offer a choice of managed fund where some are riskier than others by virtue of a greater exposure to shares or other potentially volatile investments.
Specialist funds
These are funds that cater for savers who wish to make their own investment decisions by investing in specialist funds that are focussed purely on one type of asset. The majority of providers offer a range of such specialist funds.
Tracker funds
These are funds that can be characterised as “passive” as they aim to follow or ‘track’ the performance of a specific stock market index such as the FTSE 100 or the FTSE All Share Index. As expected the funds will fall and rise in tandem with the share prices of the indices that the funds track. It follows that an advantage of these funds is that investors can avoid choosing a poor fund manager who may be less responsive and whose performance will lag behind the indices.
Lifestyle funds
A hybrid form of funds in the sense that they are usually subject to an arrangement whereby savings are first placed in a tracker fund before being gradually shifted into a safer fixed interest fund over a period between 5 to 10 years. This switch usually occurs as the policyholder approaches the age of retirement and is made primarily to protect them against a potential sudden fall in the stock market just before retirement.
If you are considering going down the unit linked route or simply require more information regarding whether or not this type of scheme is suited to your personal situation, consulting with an IFA could be a good idea.
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