When you invest in a workplace or personal pension, you often have the choice to select a specific investment strategy. For many, the default option is a “lifestyle” pension. But recent analysis suggests this common approach might be far riskier than previously thought.
What is a Lifestyle Pension?
A lifestyle pension (or lifestyling strategy) is an automated investment approach designed to reduce risk as you approach retirement.
In your younger years, the pension is heavily invested in equities (stocks and shares), which offer the potential for higher growth but come with greater volatility. As you get closer to your target retirement date—typically starting 5 to 10 years prior—the strategy automatically begins shifting your money out of equities and into lower-risk assets, such as bonds and cash.
The goal is to protect your accumulated wealth from a sudden stock market crash just before you plan to retire and start drawing an income or buy an annuity.
The Hidden Risks of Playing it Safe
While the intention behind lifestyling is sensible, recent reports highlight a significant flaw in this strategy for modern retirees. According to FT Adviser [1], wealth managers are warning that lifestyle pensions could be reducing pension pots by six-figure sums.
The problem lies in the rigid nature of the strategy. By automatically shifting into low-risk, low-return assets, lifestyle pensions can severely stunt the growth of your pot during the crucial final years of accumulation.
Furthermore, the retirement landscape has changed dramatically. In the past, most people used their pension pot to buy an annuity (a guaranteed income for life) at a set retirement date. Today, with the advent of pension freedoms, many retirees choose to leave their money invested and draw an income flexibly over time (drawdown).
“If you plan to stay invested for another 20 or 30 years, moving your entire pot into cash and bonds at 60 does not remove risk — it simply swaps one risk for another.”
If you plan to leave your money invested for another 20 or 30 years during retirement, prematurely shifting your entire pot into cash and bonds can expose you to a different kind of risk: inflation risk. If your investments aren't growing fast enough to outpace inflation, the real purchasing power of your money will steadily decline.
The Importance of Active Investment Choices
The “set it and forget it” appeal of a lifestyle pension is strong, but it may not align with your actual retirement plans.
Interestingly, there is a growing desire among savers to take more control. A separate report from FT Adviser [2] notes that seven in ten pension savers want greater investment choice. However, navigating those choices can be daunting.
It is vital to regularly review your pension strategy, especially as you enter the final decade before retirement. You need to ensure that your investment risk profile matches how you actually intend to use your money. If you plan to remain invested through retirement, a rigid lifestyle strategy that forces you into cash may not be appropriate.
Three Questions Worth Asking Your Provider
- Am I in a lifestyling or target date fund? Many savers are, simply because it was the default when they were auto-enrolled.
- What retirement date is my pension working towards? If it still says 60 or 65 from a form you filled in twenty years ago, the de-risking may already have begun.
- What does the glide path actually move me into, and when? The pace and the destination vary enormously between providers.
Are you unsure if your pension strategy is right for you?
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