Can I stop my pension company sticking my savings into a lifestyle fund?

Lifetyling fund:  A safer option or better avoided in the run-up to retirement?

Can I stop my pension company sticking my savings into a lifestyle fund? 

I’ve heard people have suffered horrendous losses just before retirement. 

Or is it an over-reaction to avoid lifestyling altogether?

Tanya Jefferies, of This is Money, replies: The bond market crash last year drew attention to a little-known or understood investment strategy that many workers are ‘defaulted’ into in the run-up to retirement.

Some older workers discovered they were sitting on huge losses because late in their working life their pots were shifted out of stock markets and all or part way into bonds.

The process is known as lifestyling, de-risking, or sometimes target-dating

Typically, this had been regarded as the safer option.

It affects people in defined contribution pensions, where you build a pot invested for retirement, not defined benefit or final salary schemes, where an employer is responsible for paying you a guaranteed income for life.

Meanwhile, people learning of the disastrous losses some workers faced on the brink of retirement will understandably wonder whether they should avoid lifestyling altogether, or if there are advantages to it.

Interest rate rises have led to higher bond prices, which are making them a more attractive opportunity for new buyers.

We asked a finance expert to explain how to decide whether to let your pension provider move your savings into a lifestyle fund as you approach retirement.

He gives a rundown of how lifestyling works, what has happened in bond markets, and how your future financial plans might affect your choice. 

For example, are you open to buying an annuity now deals have improved, or do you intend to keep you pension invested throughout a retirement that could last decades. 

Rob Morgan, chief analyst at Charles Stanley Direct, replies: Lifestyling can be useful in the right circumstances.

Rob Morgan: Usually lifestyling happens over the course of five to 10 years before a set retirement date

The problem is that some versions of it are relevant to fewer people than in the past, which is why it’s important to examine how your pension works.

What are lifestyle funds?

To recap, lifestyle or target retirement funds focus on assets to maximise growth, mostly shares, in the early and middle years of your working life.

Then, based on a predetermined path, they migrate gradually to different investments, often high-quality bonds, as a nominated retirement date approaches.

It’s a popular default option across many defined contribution pension plans, especially those set up by employers, so if you have not made an active choice about where your pension is invested then you may have been put into a fund or process that does this.

When it starts and how the lifestyling process works varies. Usually, it happens over the course of five to 10 years before a set retirement date, with the traditional objective to lock in on the cost of buying a guaranteed lifetime income from an insurance company known as an annuity.

If the cost of an annuity rises in the important years leading up to retirement, then the pension fund should grow to reflect that, and if it falls then the fund can likewise decline in value.

What happened to make people wary of lifestyle funds?

For many years this worked out well enough, but then two things happened. First, a rule making it compulsory for UK retirees to purchase an annuity with most of their pension pot was scrapped back in 2015.

Since then, pension pots can be used in different ways. You can take larger lump sums, or even the full value, as cash, albeit it probably won’t be tax efficient to do so, or you can keep investing and draw a regular or flexible income generated from investment returns.

In either of these circumstances a lifestyling fund or process may not be required, or indeed beneficial.

Second, and more recently, we have seen a seismic shift in the bond market. Bonds are essentially IOUs issued by governments and companies that pay a fixed rate of return, and their value is very sensitive to inflation and interest rates.

The past couple of years has seen huge volatility as an era of very low interest rates gave way to far higher rates as central banks tried to rein in the significant inflation we have since the pandemic.

Higher bond yields, meaning lower prices, have taken their toll on funds holding this asset class, and many lifestyle funds were no exception.

What can pension savers who suffered losses do now?

The saving grace for some people with lifestyling funds is they have done the job for which they are intended.

The cost of buying an annuity has tumbled too, so they buy much the same level of income as before.

That’s cold comfort, though, for anybody not wishing to buy an annuity at their previously stated retirement date, or at all.

Some people wishing to keep investing their pot, or draw a sizable portion out, have been left exposed by a process that no longer fits with their intentions.

Should you still consider a lifestyle fund?

Going forward, the outlook is not too bad for bonds, and hence the lifestyle funds that own them. The big move down in prices as inflation and interest rate expectations shifted suddenly is water under the bridge.

Today, the higher bond yields available are a valuable cushion against future volatility, and for those commencing or at an early stage of the lifestyling process today things may work out well.

In pension planning, however, the focus must always be on your specific objectives and time horizon – when you are taking money from your pension and how you are planning on doing so.

To that end, lifestyling may still be very useful for some people. It can provide more certainty for those who do not wish to make investment decisions with their pension funds, and who have already made up their mind to buy an annuity at a selected retirement age.

However, this applies to relatively few people these days, and for others it could be counterproductive, or even dangerous, as it restricts growth and still carries risk of inflation and interest rates being higher for longer.

Those who think they are going to be continuing to invest but draw flexibly on their pension are likely to be served better by a strategy that retains a reasonable amount in shares.

Alternatively, those wanting to draw lots of cash in one go could consider shifting gradually to a cash or money market fund as their date for doing so approaches.

This is likely to be more effective in terms of managing volatility and the risks associated with inflation and interest rates.

Indeed, some versions of lifestyling already offer these options, or otherwise build in more resilience to bond market fluctuations, so it is important to understand the specifics of your own pension plan rather than make any assumptions.

Can you avoid moving your pension into a lifestyle fund?

Finally, turning to whether you can stop your pension from being invested this way, the answer is yes, either before it has started or during.

If you have lifestyling, your pension provider should notify you before it starts, so you have the chance to opt out.

You should also be able to either change the date at which lifestyling commences – and make it a long time in the future if desired – or alter the fund choice to something that’s suitable for your needs.

Get in touch with your pension provider to discuss how your plan works and your options, and if in doubt get some qualified financial advice as a mistake during the run up to retirement can be costly.

This post first appeared on Dailymail.co.uk