Should I rebalance my pension funds?

As some funds have performed better than others, one reader of our sister magazine Moneywise asks whether it's time to shake things up.

I have been paying into a work-based Additional Voluntary Contribution pension scheme (AVC) since April 2011. My monthly contributions are split equally between three funds at the medium to higher risk level. As the funds have performed differently, should I rebalance them? And, if so, how frequently?

Initial diagnosis

Whether you're investing in an AVC, a self-invested personal pension (SIPP) or your workplace scheme, regularly reviewing the underlying investments can make a significant difference to your eventual retirement income.

While a regular review is good practice, Fiona Tait, technical director at Intelligent Pensions, says pension investors often set up a portfolio of investments and then forget about them. "As each fund performs differently, the balance of the portfolio is highly likely to change over time," she explains.

"As it's the higher risk funds that are likely to perform best, they will form an increasingly larger proportion of the portfolio. As a result, you can find yourself unwittingly taking more risk with your money."

This has happened to some extent with your portfolio, which is made up of three funds: BlackRock Aquila (50:50) Global Equity Index, Prudential Global Equity and Prudential International Equity. Although you have paid the same into each fund, differing performance means the Prudential International Equity fund now accounts for 36.1% of your portfolio with the BlackRock and Prudential Global Equity funds making up 32.4% and 31.5% respectively. 

Treatment plan

While they have only shifted marginally from equal weighting, Ms Tait says it is sensible to rebalance them: 

"If the fund selection was right when the plan was set up, and if nothing else has changed, then you should look to restore the balance of your funds. This will maintain the same level of investment risk."

Undertaking this exercise may also be easier than it sounds. Rather than spending half an hour with a calculator working out what you need to buy and sell, Barnaby Balkwill, financial planner at Ablestoke Planning, says most providers offer an automatic rebalancing option, usually on a quarterly or annual basis. 

"I'd recommend the shortest period of time for rebalancing as a strong movement in the market could mean you're taking a higher or lower risk than you desire," he adds.

"The major downside is that the money could be allocated from a stronger performing fund into a weaker one, so continue to review your funds at least annually to make sure they're on track." 

Additional benefits of treatment

Reviewing your portfolio annually has a number of additional benefits. According to Mr Balkwill, this exercise will ensure you take an appropriate level of risk for your circumstances and that your investments remain in line with your future goals. 

"As you'll have a guaranteed final salary pension as well as the state pension, you may be able to take a bit more risk with this AVC," he adds.

"Similarly, if your review finds that your income in retirement is facing a shortfall, you may wish to take more risk with your AVC investments."

He also recommends filling out an attitude-to-risk questionnaire, which most pension and investment providers offer to help you assess how much risk you are prepared to take. Another important factor to weigh up in your annual review is the length of time you have until retirement. With more than 10 years to go, you can probably afford to ride the ups and downs of the stock market, but you may wish to adjust your investments to reduce your exposure to risk once you get closer to retirement.

Scott Wylie, investment manager at wealth management firm Mattioli Woods, adds: "I would certainly look to increase exposure to commercial property and fixed interest. This would create some further diversification but would also reduce overall risk as retirement approaches."

Alternative therapies

A more radical approach is also possible, as Mr Wylie explains: "There might be benefits in moving the entire AVC to an alternative pension provider offering a broader range of funds, a wider range of asset classes and ultimately, lower costs." 

While the prospect of lower charges and greater investment flexibility can be attractive, it is not a move that should be taken lightly. 

"It's not always suitable," says Mr Balkwill.

"Your employer might not be able to pay regular contributions into another pension, so you may have to leave some of the money in the AVC even if you wish to transfer."

Sam Barrett writes for Money Observer, Insurance Post and FTAdviser.com.

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