Pension savers could unwittingly lose out on tens or even hundreds of thousands of pounds if they allow their fund to be ‘lifestyled’ in the run-up to retirement, new analysis reveals.
The strategy, called “lifestyling,” is the widespread but little-understood practice of gradually derisking pensions that many people with invested ‘defined contribution’ pots will be defaulted into without realising in the decade before retirement age.
How lifestyling works and its potential drawbacks
The approach involves shifting savings out of stock markets and all or part way into bonds, historically regarded as the ‘safer’ option, and cash in the years before retirement. The aim is to ensure savers don’t suffer big losses due to a financial market crash just before they retire.
It can be suitable for those who intend to cash out or want to maximise a fund to buy an annuity to fund old age, but can backfire on long-term investors. Being in a mix of cash and government and corporate bonds – typically low growth compared with stocks – is not advisable if you plan to stay invested in stock markets and try to keep growing your pension throughout old age.
Adrian Murphy, chief executive of Murphy Wealth, warns: ‘The approach lifestyle pensions take sounds sensible enough, but the reality is that lifestyle pensions are actually far riskier than you initially think.’
Lifestyling reduces the potential returns on the pot when they can make the most difference, he says. ‘Because your pension fund will be at its largest in the later years, this is when compounding can have the greatest impact – a difference of just a few percentage points in annual returns could mean tens of thousands of pounds.’
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Murphy points to the events of 2022 as a cautionary tale. ‘Rising interest rates saw the value of bonds collapse, leaving a large hole in many retirement plans – particularly those who were in lifestyle strategies that had begun to de-risk. What was labelled “low risk,” in fact turned out to be far from it.’
Although bonds are generally ‘safer’ and less volatile than stocks, this shows how you can get unlucky with the timing of bond crashes. Bond markets are currently in turmoil again after US debt hit $40trillion, and a market intervention has so far failed to halt a bond sell-off.
What can lifestyling cost you?
Murphy looked at the median salary of £29,000 for someone aged 22-29, who is making the minimum pension contributions through auto-enrolment or putting in bigger sums.
The contribution figures below include personal and employer contributions and tax relief from the government, and assume wage growth of 3 per cent a year on average over 40 years.
Murphy calculated the returns if you remained invested in the final decade versus moving into cash and bonds in that period.
The investment growth assumptions are 6 per cent for stocks, which Murphy says is a relatively conservative return, versus 2 per cent which is more typical of bonds and cash under a lifestyling strategy.
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Contributing £132.80 a month under auto enrolment
Remain invested £395,000
‘Lifestyled’ pot £232,000
Difference £163,000
Contributing £250 a month
Remain invested £492,000
‘Lifestyled’ pot £279,000
Difference £213,000
Contributing £500 a month
Remain invested £984,000
‘Lifestyled’ pot £558,000
Difference £426,000
Should you let your pension be ‘lifestyled’?
If you are ten or fewer years away from the normal retirement age set by your pension scheme, you should check whether your fund is going through the process known as lifestyling, de-risking, or sometimes target-dating.
You might have received letters about it and not realised the implications, or some pension funds have stopped sending paperwork and inst
