‘Lifestyling’ is the default investment option of many pension savers, but relying on it may be the wrong approach.
Many defined contribution pension plans automatically move savers’ investments into lower-risk funds as they approach their retirement age – a practice known as ‘lifestyling’. The exact mechanism varies between providers, but a typical structure would involve a move to 75% fixed interest, 25% cash, phased automatically over five to ten years to the chosen retirement date.
“The idea is that you lock-in investment returns made in your 20s, 30s and 40s, and then limit exposure to riskier assets in your late 50s and early 60s,” says Ian Price, Divisional Director at St. James’s Place “That may be the right approach if you are trying to preserve your pension savings, but it is not a risk-free option – there are some drawbacks.”
What lifestyling normally does not do is offer any form of discretion or individuality in the investment strategy: the process involves mechanistic switches, triggered only by dates in the calendar. Thus, anyone within the phasing period of their lifestyle plan could find part of their pension investments being moved out of equities into bonds and cash at a time when equity markets have dropped. If the fixed-interest element is moved into gilts – as it often is – this would be another disadvantage because gilt yields are at historic lows.
Individuals should also be aware that if they continue working beyond their stated retirement age and fail to inform their provider, their money could be in ‘de-risking’ mode for an unsuitably long period. A recent survey found that over half of those aged between 54 and 71 already are, or predict, working beyond the State Pension age. Yet, despite clear changes in their planned retirement age, more than half of this group had not informed their product providers. 1
Lifestyling is an option that has appealed to, and been valued by, many investors over many years – especially those who have followed traditional routes to retirement. However, pension reforms have prompted a big rethink of many practices that were once considered the norm. Today, people get far greater choice over how to spend their own pension pot and that means ‘locking in’ investment growth in preparation for an annuity purchase isn’t always appropriate.
“Lifestyling will help protect you against short-term falls in the value of your pensions savings as you get nearer to retirement, but that is only really suitable if you intend to purchase an annuity,” says Price. “If you opt to keep the pot invested and draw down money from it gradually over the course of your retirement, maintaining higher equity exposure is likely to make more sense.”
It is often said that lifestyling is not designed to produce the best results; its appeal is that it helps to avoid the worst results. A tailored solution to fit individual needs has an obvious appeal over a one-size-fits-all approach. But that means making difficult decisions; and these, says Price, should be made with the help of a financial adviser.
“A financial adviser will understand your individual circumstances, recommend appropriate investments and sensible income levels. They will keep an eye on the funds for you over time and provide further advice if circumstances change. A lifestyle fund will not do that.”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
1 ‘Engaging with baby boomers’ retirement journeys’, Dunstan Thomas, November 2017.
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Representing only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products.