Pensions  

Why they are good for the disengaged investor

This article is part of
Guide to using Target Date Funds

Why they are good for the disengaged investor

Target Date Funds (TDFs) tend to be used in the UK on the institutional side more than for retail investors, but in the US they are the main form of saving, whether that be for one’s pension or for children’s university fees.

The most important point is keeping in mind when you want the money - at age 65, or when your child hits 18. 

And for the retail investor, they are an easy, ready-made option for someone who does not want to think about managing their savings, but to leave them locked up and allow the assets to grow, ready for the end point when they need them.

Henry Cobbe, director of Elston Consulting, says: “They’re designed to grow when they’re designed to grow. They’re a ready-made strategy for someone who doesn’t know how to make these choices.

“They nudge you into the right strategy. It’s ideal for the low engaged customer, where other people will do [the fund switches] for you.”

TDFs are available to retail investors on platforms such as Hargreaves Lansdown, and for the retail investor, with providers Vanguard and Architas offering TDFs direct.

Investors who want to take this option can simply self select, using a number of different approaches.

Mr Cobbe notes: “The first strategy is a 'One and done' fund: what year do you turn 65? That’s your target date. Pick the matching TDF and let it do the rest for you so you can get on with your life. 

“The second option is goal-based funds: the target date is the date you expect withdrawals to commence. So if you are saving up for a goal, for example, saving for children’s university fees in a JISA [Junior Isa], this is an easy, risk-managed way of doing it. 

“You get the growth in the earlier years but the strategy gets more cautious as you get closer to the time you need the money. There is no lock-in, so if you want to switch or change your target date it’s just like any other fund.

“The third option is decumulation: the target date is the date you expect withdrawals to commence. That date may be in the past if you are in decumulation."

He adds: “While a TDF is cautiously managed after the target date, it’s up to the investor to manage their own withdrawal rate."

Default strategy

On the institutional side, target date funds are used for workplace schemes, and have been taken up by master trusts.

Nest, for example, uses them as its default fund, after deciding it was the best option for people who did not want to be actively engaged in the management of its pension fund.

Paul Todd, director of investment development and delivery at Nest, says: “We’ve been using TDFs since we first started investing back in 2011. Our expectation was the vast majority of the membership wouldn’t be taking an active decision when they auto-enrolled, and 99 per cent are in the default strategy.”