What is pension lifestyling and is it right for me?

If you have a workplace or personal pension then it may utilise lifestyling. Most people however will be unaware of what this is, if it applies to their pension fund and what the potential implications are.

As part of reviewing if you are on track for the retirement you want, lifestyling is one factor that you may need to consider, so this article will help you to have a better understanding of this particular investment approach.

What is lifestyling?

Lifestyling is designed to grow your pension savings over most of your working life and then help you reduce the risks you face with your pension savings as you approach your retirement age.

It means that as you get closer to your selected retirement age, your pension provider will automatically switch into investment funds which align with how they believe you are likely to use your pension savings. This typically means that a larger proportion of your pension will move into funds which are perceived as carrying a lower level of investment risk, such as fixed interest funds and cash. This helps to reduce the risks of short-term falls in the value of your pension savings.

How do I know if this applies to my pension?

Your pension provider will be able to explain to you which pension fund you are invested in and if this is part of a lifestyling approach. If you have a personal pension, or belong to a workplace defined contribution pension scheme and you haven’t chosen how you want your contributions invested, your money will usually automatically go into your scheme provider’s ‘default’ fund. Default funds tend to adopt a lifestyling approach as this provides additional protection to savers who are less engaged with their pensions.

Providers can also give you an explanation of what the alternatives are to your default fund, however they will not be able to give you any advice on what funds are suitable for your circumstances or what level of risk you should take.

How do I know if lifestyling is right for me?

This will depend on a large number of individual factors but here are some key things to consider.

Is your pension fund targeting the right retirement outcome? Since the introduction of Pension Freedoms in 2015, fewer people are using their pensions to buy an annuity and instead go into income drawdown. Modern lifestyling pension funds tend to be better designed for different retirement approaches and may offer you the ability to stay invested and take an income from your pension pot, target an annuity or take your benefits as a cash lump sum.

Older employer pension schemes however will generally adopt lifestyling approaches which are aimed towards preserving the value of your pension fund in anticipation of you taking the maximum tax-free lump sum and purchasing an annuity with the remaining savings. This typically means moving into fixed interest funds and cash, which tend to be less volatile. If you’re heavily invested in fixed interest funds in drawdown, your investments may not have the potential to keep pace with inflation, reducing their purchasing power over time. Prior to retirement, this could also mean that you miss out on potential growth in the value of your pension , which could affect how long your savings can sustain your desired level of income throughout retirement.

Are you still working towards your originally planned retirement age? If you decide to take your benefits before or after the selected age then the lifestyling approach will not be working towards your actual retirement date, and funds may not be switched at the right time to meet your aims.

Will your pension be your main source of income? Lifestyling is designed to suit the needs of most people saving for their retirement but if your pension is not going to be your main source of retirement income, then lifestyling may not take into account your personal attitude towards the risk you are prepared to take and return you expect.

What other options are available?

Lifestyling is an option that appeals to, and is valued by many investors, because it allows your investments to change automatically as you approach retirement. However, some people prefer to have more active control over their investment planning as they approach retirement.

If you’re in a lifestyle fund that is currently targeting an outcome – for example an annuity purchase – that you no longer want, or you feel that a lifestyling approach is not suitable for you, you can firstly talk to your pension provider, who can help you understand your options. You may be able to choose another lifestyle programme which does fit with your plans or update your selected retirement age to reflect when you actually intend to retire.

You may also have the ability to turn lifestyling off so the automatic changes won’t happen or, alternatively, you may prefer to choose different funds/investments that reflect your plans and review these on an ongoing basis as you approach retirement. In these circumstances, you should seek the help of an independent financial adviser, who will be able to give advice based on your individual circumstances.

Luke Norman is a Financial Planner at Progeny.

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