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

Can I stop my pension company from investing my savings in a lifestyle fund?

I have heard of people who have suffered horrendous losses just before they retired.

Or is it an overreaction to completely avoid the lifestyle?

This is Money’s Tanya Jefferies responds: The bond market crash last year brought attention to a little-known or understood investment strategy that many workers “default” on in the run-up to retirement.

Some older workers discovered that they were enduring huge losses because at the end of their working lives their funds were moved out of the stock markets and in whole or in part into bonds.

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

Normally, this had been considered the safest option.

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

Meanwhile, people hearing about the disastrous losses suffered by some workers on the brink of retirement will understandably wonder whether they should avoid the lifestyle altogether or whether it has advantages.

Rising interest rates have caused bond prices to rise, making them a more attractive opportunity for new buyers.

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

It offers an overview of how the lifestyle works, what has happened in the bond markets, and how your future financial plans could affect your choice.

For example, are you willing to buy an annuity now that deals have improved, or do you intend to keep your pension invested for a retirement that could last decades?

Rob Morgan, chief analyst at Charles Stanley Direct, responds: The lifestyle can be useful in the right circumstances.

Rob Morgan: Typically, the lifestyle happens over the course of five to 10 years before a set retirement date.

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

What are lifestyle funds?

In short, lifestyle or retirement funds focus on assets to maximize growth, primarily stocks, in the early and middle years of your working life.

Then, following a predetermined path, they gradually migrate to different investments, often high-quality bonds, as their designated retirement date approaches.

It is a popular default option in many defined contribution pension plans, especially those set up by employers, so if you haven’t actively chosen where to invest your pension, you may have been put into a fund or process that does so.

When it starts and how the lifestyle process works varies. This typically occurs within five to ten years before a set retirement date, with the traditional goal of locking in the cost of purchasing a guaranteed lifetime income from an insurance company known as an annuity.

If the cost of an annuity rises in the important years before retirement, then the pension fund should grow to reflect that, and if it falls, the fund may also lose value.

What happened to make people distrust lifestyle funds?

For many years this worked quite well, but then two things happened. Firstly, a rule requiring UK retirees to buy an annuity with the majority of their pension fund was removed in 2015.

Since then, pension funds can be used in different ways. You can take larger lump sums, or even the entire value, as cash, although it is probably not tax efficient to do so, or you can continue to invest and earn regular or flexible income generated from the investment returns.

In any of these circumstances, a lifestyle fund or process may not be necessary, or even beneficial.

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

Recent years have seen enormous volatility as an era of very low interest rates gave way to much higher rates as central banks attempted to curb the significant inflation we have had since the pandemic.

Higher bond yields, meaning lower prices, have taken their toll on funds that hold 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 lifestyle funds is that they have done the job they were intended to do.

The cost of purchasing an annuity has also fallen, so they buy virtually the same level of income as before.

However, that is little comfort to anyone who does not want to buy an annuity on the previously stated retirement date, or does not want to buy one at all.

Some people who want to continue investing their pot, or withdraw a considerable portion, have been exposed to a process that no longer fits their intentions.

Should you still consider a lifestyle fund?

Looking ahead, the outlook is not so bad for bonds and, therefore, for the lifestyle funds that own them. The big drop in prices as inflation and interest rate expectations suddenly changed is a thing of the past.

Today, the higher bond yields available are a valuable cushion against future volatility, and for those starting or early in the lifestyle process today things can work out well.

However, in pension planning, the focus should always be on your specific goals and time horizon – when you withdraw money from your pension and how you plan to do so.

To that end, the lifestyle can still be very useful for some people. It can provide more security to those who do not wish to make investment decisions with their pension funds and who have already decided to purchase an annuity at a certain retirement age.

However, this applies to relatively few people today, and for others it could be counterproductive, or even dangerous, as it restricts growth and still carries the risk that inflation and interest rates will remain higher for longer. time.

Those who think they will continue to invest but draw flexibly on their pension will probably do better with a strategy that holds a reasonable amount of shares.

Alternatively, those who want to withdraw a lot of cash at once could consider gradually switching to a cash or money market fund as the date to do so approaches.

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

In fact, some lifestyle versions already offer these options or otherwise create greater resilience to bond market fluctuations, so it’s important to understand the details of your own pension plan rather than making assumptions. .

Can you avoid moving your pension into a lifestyle fund?

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

If you are a lifestyle pension provider, your pension provider must notify you before it starts, so you have the opportunity to opt out.

You should also be able to change the date you start the lifestyle (and make it longer if you wish) or modify your fund choice to something that suits your needs.

Contact your pension provider to discuss how your scheme and options work and, if in doubt, get qualified financial advice, as a mistake in the run-up to retirement can be costly.