What is pension "lifestyling" and why it could harm your retirement plans

“Lifestyling” is a default investment strategy that many pension schemes use. Designed to balance different types of investment risk as you approach retirement, it can help your money grow and protect its value.

As a rule, funds used for those close to retirement age generally have a lower risk profile.

Many pension providers offering lifestyle strategies often talk about how the approach offers a “glide path” to retirement, emphasising the potential for a smooth approach to the date when you can start drawing your pension.

This is because, since pension funds will have been moved away from higher-risk assets several years before you retire, lifestyling is designed to help to reduce the risk of your savings being harmed by stock market fluctuations.  

In short, lifestyling is an investment approach that’s intended to grow your pension savings over most of your working life, then protect the value of those built-up pension savings as you approach your planned retirement age.

However, adopting a lifestyle approach may not be suitable for everyone.

How lifestyling works in practice

1. Growth stage

Generally, when your retirement is still a long way off,your pension savings will be invested in funds that aim to grow the value ofyour money over time.

2. Pre-retirement stage

This is when you're starting to approach retirement. Gradually, your money will begin to be moved into funds that are considered lower risk, in preparation for your money to be in “safer” funds ready for when you retire.

3. At retirement stage

When your retirement is only a few years off, your money gradually starts to move to funds that aim to make sure you're in the right investments to realise your retirement plans.

Pros and cons of lifestyling

As with any choice, lifestyling your pension presents advantages and disadvantages.

Benefits of pension lifestyling

  • Moving to a lower-risk fund reduces the impact of falls in the stock market close to your chosen pension date
  • Gradually moving your pension savings reduces the risk of switching at a single point when the market price is low
  • Moving your pension savings gradually means that savings remaining in higher-risk funds benefit from any future growth.

Drawbacks of pension lifestyling

  • Because lifestyle switching targets your chosen pension date, if you access your pension savings before or after that date,funds may not be switched at the right time. One downside of this is that it could result in you investing in lower risk funds too early or higher riskfunds for too long.
  • You may miss out on future growth if financial markets produce strong returns.
  • Inflation may reduce the buying power of your pension savings and affect your future income – a low-risk fund with lower growth potential may not always outperform inflation.

De-risking strategies should be implemented according to how you wish to use your pension

With the introduction of Pension Freedoms in 2015, a single lifestyling option is unlikely to suit everyone.

Whether you want to guarantee your retirement income by buying an annuity, flexibly drawdown your pension fund, or take a series of cash lump sums over time, de-risking strategies should be designed to fit the goal.

For example, if you wish to access your pension flexibly, lifestyling is unlikely to be right.

This is because it would require you to switch your pension to a lower-risk fund that reduces its growth potential – in turn, this move could mean you achieve a smaller retirement pot. It could result in not only reducing the level of income you can take from your pension fund, but also affect its potential longevity.

If you follow a lifestyling approach, your pension savings will remain in a lower-risk fund during retirement, which could also have significant implications.

These days, retirement can last for 20, 30, or even 40 years. Holding your savings in a low-risk fund over three or four decades will mean you will more than likely benefit from lower growth than you would by holding your investments in medium- or high-risk funds.

Read more: Why advice is vital when you start to spend your wealth in retirement

Does your workplace pension scheme use lifestyling?

Many workplace pension schemes use lifestyling, so it’s wise to check whether this is the case with yours and, if so, whether it’s right for you. As explained above, it may not be. We’d be happy to confirm the situation and explain your options.

Retirement has evolved

Retirement and the way we save for later life have evolved. If you aren’t sure what fund choices your scheme provider offers, or how their fund choices have changed since you first signed up, it's a good idea to find out.

You may discover that your pension provider has failed to keep up with the changing times, or that the fund performance isn't what you hoped. If this is the case, it may be prudent to look around for better options.

You may find that a different provider offers the potential for improved fund performance. Plus, some providers offer great services andadvice to members at or approaching retirement. Both of which could help make a difference to the lifestyle you may be able to afford when you retire.

Get in touch

Whether your retirement date is near, or many years away, it’s never too soon to put a plan in place. If you’d like to take control of your future and invest your pension savings to meet your specific aims, we can help you create a financial plan to structure a tax-efficient income in retirement.

Email enquiries@alexanderpeter.comor call us on +44 1689 493455.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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