The pros and cons of pension lifestyling: Is it the right choice for you?

Many pension providers deploy a lifestyling investment strategy to help grow your savings during your working life and then safeguard your pension as you get closer to retirement age.

If your pension is in a lifestyle fund, when you’re younger with more working years ahead of you, your savings might be placed in investments with greater risk and higher returns. Then, around five years before your retirement date, your pension savings may be moved into more conservative investments.

Ultimately, a pension lifestyle fund uses default investment strategies to manage your savings automatically. If you don’t actively manage your pension investments, you may be inadvertently investing in a fund that uses the “lifestyling” method.

You or your employer might have selected this option when your account was set up or later. If so, your savings will gradually be moved into lower-risk funds as your retirement date approaches.

How pension lifestyling works

A lifestyle fund typically follows three stages:

1. Growth stage: When you have many working years ahead of you, your savings could be invested in funds that have the potential to grow the value of your pension pot over time.
2. Pre-retirement stage: Around five years or so before your planned retirement date your money may be gradually moved into lower-risk funds.
3. At retirement stage: When you’re only a couple of years away from retirement your savings may gradually be moved to funds that ensure your savings align with your retirement plans.

The lifestyling option might have been selected for you if you’re on a default plan, but you can usually opt out at any time.

According to research published by IFA Magazine, 1 in 7 UK adults have never checked their pension, but instead, rely on default schemes to manage their funds[1]. Do you know how your pension savings are invested?

While it may seem appealing to have your savings managed for you, understanding the pros and cons of pension lifestyling could help you to make an informed choice about how and where your retirement savings are invested.

The potential pros of pension lifestyling

Pension lifestyling offers several benefits for some savers, including:

• Moving your money to a lower-risk fund could help to protect the savings you have built up from the potential harmful effects of falls in the stock market close to your retirement age
• By transferring your money gradually in the years leading up to your retirement there is less risk of needing to move your savings at a time when the market price is low
• As your savings are moved gradually from higher- to lower-risk investments (typically over several years), your pension pot could benefit from the money left in funds with a potentially higher rate of return
• Lifestyling happens automatically, so you can focus your attention on other aspects of your finances.

While pension lifestyle funds offer benefits to some savers, there is no one-size-fits-all approach to retirement saving.

As such, it’s worth reviewing your situation and saving goals and considering all options before you commit to how and where to invest your pension savings.

Your Aspira financial planner can help explain the different options available. They will help you understand what might be appropriate for you based on your current circumstances and your retirement goals.

The possible cons of pension lifestyling

Pension lifestyling may not be the most appropriate choice for everyone, and they do have some drawbacks you might want to consider. These include:

• Your retirement could last 20, 30 or even 40 years. If your savings have been moved into a lower-risk fund as part of the lifestyling process, you could miss out on many years of potential growth during later life. This may reduce both the level of retirement income you can draw and the number of years your pension pot lasts.

• Since default lifestyling options are designed to meet the needs of many, it may not suit your individual retirement needs, attitude to risk, or savings goals.
• Your savings will be moved in line with your chosen retirement date. If you decide to access your pension earlier or later than planned, this could mean that your money is not switched at the best time for maximising your returns.
• If your savings are moved into a low-risk fund this could leave you with less potential for growth. As a result, rising inflation could reduce the real-terms value of your pension savings.
• If your personal circumstances or retirement plans change, a lifestyle pension fund may no longer meet your needs.

Talking to a financial planner could help you better understand your pension choices

If you pay into a default pension scheme that you’ve never checked, you could be signed up for a lifestyling option that doesn’t suit your retirement plan.

Talking to a financial planner could help you understand whether pension lifestyling is appropriate for you.

If you wish to take more control of how your pensions savings are invested, your Aspira financial planner can help you tailor your investments to suit your appetite for risk and meet your retirement goals.

Get in touch

To find out more about how we can support you in planning for your retirement, please email us at info@aspirafp.co.uk or call us on 01454 632 495.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation to any investment or retirement strategy.

You should seek independent financial advice before embarking on any course of action.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. 

[1] https://ifamagazine.com/one-in-seven-uk-adults-have-never-checked-their-pension/

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