A widespread but often misunderstood pension strategy known as 'lifestyling' may be costing retirees tens or even hundreds of thousands of pounds, according to new analysis. Lifestyling is a default process where pension pots invested in defined contribution schemes are gradually shifted from riskier assets like stocks to safer options such as bonds and cash in the decade before retirement.
While intended to protect savings from market downturns, this strategy can significantly reduce potential returns at a time when compounding could have the greatest impact. Adrian Murphy, chief executive of Murphy Wealth, warned that the approach sounds sensible but is actually riskier than many realize. "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," Murphy stated.
The events of 2022, when rising interest rates caused bond values to collapse, served 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," Murphy noted. He added that what was considered "low risk" proved to be far from it, demonstrating how timing can negatively affect bond investments.
Murphy's analysis compared the outcomes for individuals remaining invested in stocks versus those who moved into bonds and cash in the final decade before retirement. For someone contributing £132.80 per month (including employer contributions and tax relief) and remaining invested, the final pot was calculated at £395,000. In contrast, a 'lifestyled' pot for the same individual yielded £232,000, a difference of £163,000. For those contributing £500 per month, the difference widened to £426,000, with a fully invested pot reaching £984,000 compared to a 'lifestyled' pot of £558,000.
Retirees planning to access their pensions within the next 10 years are advised to check if their fund is undergoing lifestyling, also referred to as de-risking or target-dating. While some individuals may find this strategy aligns with their goals, such as securing a fixed income through an annuity, it may not suit long-term investors who wish to continue growing their pension throughout retirement. Murphy emphasized the importance of aligning one's investment strategy with their actual retirement plans.
While the exact number of individuals in lifestyle pension funds is not publicly available, the majority of the UK's 22 million workplace pension savers are likely enrolled in default funds, which often employ a lifestyle approach. Recent shifts have seen some strategies move away from full de-risking into cash, instead maintaining a blend of lower-risk assets like short-dated bonds and defensive equities closer to retirement. However, these newer approaches have yet to be fully tested by time.
Retirees who suspect they are in a lifestyle pension fund are encouraged to investigate the date their de-risking process begins and assess if it matches their retirement objectives.