Fidelity unveils a fresh approach to retirement savings

Fidelity International, UK mutual fund manager, today signals its ambition to shake up the retirement savings market with the launch of a new suite of investment products designed to give people greater flexibility and control over their lifetime savings.

The Fidelity Retirement Funds enable people to build up an investment portfolio during their working lives and then draw an income that should rise over time from these assets at a date of their choice. Retirees can have access to their capital at any time and, unlike traditional pensions in annuities, can pass on any remaining assets to their families.

Fidelity manages the mix of assets within the fund – initially a blend of shares, bonds, cash, commodities and property securities – so that a retiring saver has the optimum balance of investments to generate an income that aims to keep pace with inflation over a retirement that could stretch over several decades.

Richard Wastcoat, UK Managing Director, Fidelity International, says: “The needs of people planning for retirement are changing radically. A couple in good health aged 65 today have a 50:50 chance that one of them will live to be at least 93. They also have a 25% chance that one of them will live to 97. So people really do need to plan for a retirement that could last 30 years.

“Improvements in life expectancy mean that people will need to manage their investments for the long run, to draw down their savings at a sensible rate and to take action to insulate themselves from the effects of inflation. This is what the Fidelity Retirement Funds seek to do. You decide when you want to retire and we take care of the investment issues.”

Modelled on highly successful funds in the US, the Fidelity Retirement Funds tackle head-on the following issues:

Investment decisions: Fidelity takes care of asset allocation - initially a blend of shares, bonds, cash, commodities and property securities - continuously managing the mix of investments to enable the saver to build up a pot of assets and then take a an income that should rise over time

Dislike of annuities: the Fidelity Retirement Income Fund aims to offer an income that helps savers keep pace with inflation over the longer-term, while still allowing them access to their capital at any time and the chance to leave some of their retirement savings to their family

Improved longevity: Retirees can be better protected against the corrosive force of inflation over a retirement that may last up to 30 years by retaining a portion of their savings in the stock market. The Fidelity Retirement Income Fund will typically invest 30% in equities, commodities and property securities

No capital sacrifice necessary

Retirees who opt for Fidelity’s recommended annual draw-down rate of 4%, which is taken monthly, can reasonably expect to insulate their capital against inflation over the long-term – and so have the prospect of a rising income. Savers can have access to their capital at any time. On death, any remaining assets will be included in the individual’s estate and passed on to their heirs.

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. Fidelity recommends a 4% withdrawal rate because analysis suggests that this gives savers relatively stable payouts with good prospects of their investment lasting their lifetime.

Equities for life

The innovation that lies behind the design of the Fidelity Retirement Fund range is the concept that savers should continue to keep some of their money invested in the stock market beyond the point of retirement.

Defying conventional wisdom that a retiree should hold only fixed income and cash, the Fidelity Retirement Income fund will maintain a solid exposure to shares, property securities and commodities, typically at 30%. Fidelity believes this continued investment in equities is necessary to combat the corrosive effect of inflation over the far longer retirement periods enjoyed by people today.

Fidelity’s own research indicates that by keeping nearly a third of the portfolio invested in shares, property securities and commodities, with the balance in fixed income and cash, a fund can produce a reasonable and stable income while still allowing the underlying assets to keep pace with inflation over the long run.