If you don’t understand what that means, you could lose tens of thousands of pounds worth of your retirement savings. But most people have never heard of it.
The technical jargon is called “lifestyling”. It’s an automatic process that comes into play for most job and personal savings as the savers approach retirement.
Usually this is the default option, so it will happen automatically even if it’s not right for you.
If you don’t understand what it means, you could end up sleepwalking into a retirement savings disaster.
Lifestyling is designed to prevent a last-minute stock market crash from shattering the value of your nest egg just before you retire.
It does this by continually reallocating your funds from the stock market to lower-risk investments like bonds and cash over the last 10 years of your working life and into retirement.
But while lifestyle reduces your investment risk, it can drastically reduce your returns and ultimately the size of your retirement pot and retirement income.
Usually your pension company will contact you to say that your savings will be invested in a “lifestyle profile”.
It can say it will move your money into preselected funds as you approach your selected retirement date.
However, these letters often don’t make it clear that it involves continually shifting your money from stocks to cash and bonds.
Switching to lower-risk, lower-yielding bonds could backfire because it delivers a far lower investment return over a retirement that could last 20 or 25 years, said Tom Selby, head of pension policy at AJ Bell.
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Default pension funds that use lifestyle styling have outperformed the stock market, Selby said. A typical standard lifestyle fund selection would have turned £10,000 into £20,964 over the past decade, but the most popular global fund investment sector would have returned £31,420.
Measured over a 30-year period, Lifestyle would have returned £76,480 versus £101,990 for a mix of global equities. That’s £25,510 less.
Selby said, “The concept of lifestyle belongs to a bygone era when savers were forced to use their pension to buy a pension for retirement.”
Following the 2015 pension exemption reforms, most retirees now keep their money invested by drawing and taking money as needed to fund their spending.
Selby is issuing the warning now that the Financial Conduct Authority (FCA), the city’s regulator, is deliberating plans to force providers to make lifestyle styling a default option for private pensions.
“If that’s the case, millions could end up investing in a subpar fund for decades,” he said.
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Andrew Tully, technical director for annuities at Canada Life, said standard options might work for some, but de-risking might be wrong for those choosing to drawdown. “There’s no point in switching your late 50s and early 60s into bonds and cash because you could miss out on up to 30 years of stock market growth.”
Earning a higher yield is even more important now that inflation is raging.
As more people work past 65, Tully warned that some default options were being automated to the wrong target date.
Taking too few investment risks leading up to retirement can be even more costly than taking too much, he added.
It’s worth checking your corporate and personal pensions to see if you’ve already switched to a lower-risk default option, said Becky O’Connor, director of savings and retirements at Interactive Investor.
“Read each correspondence carefully to decide if you’re OK with it, and notify your pension provider if you don’t,” she said.