Pension Lifestyle Investment Strategy

My pension is invested in a lifestyle investment strategy. What is this and what do I need to know?

Gary Smith
Published: 13 Sept 2021 Updated: 13 Jun 2022

What is a lifestyle investment strategy?

Lifestyle investment strategies are commonly seen in older employer pension schemes. They are still popular, but some changes have been made to lifestyle strategies held within modern workplace pensions. A lifestyle investment strategy is applied to the lifetime of your pension membership. As you get closer to your selected retirement age, your pension investments are automatically moved into funds which are perceived as carrying a lower level of investment risk.

Why does your selected retirement age matter?

When you are in a pension lifestyle investment strategy, during the pension accumulation process, around 80% (or more) of your pension is invested within an equity fund or a managed fund. These are typically seen as higher risk investments.

Typically, ten years before your selected retirement date, your pension investments are automatically moved into fixed interest funds and cash, which tend to carry a lower level of risk. For example, if your originally selected retirement date is 65, the changes will start to be implemented on your 55th birthday. By the year of your retirement, you will end up with around 75% of your pension in fixed interest funds and 25% in cash. The rationale behind this apportioning is that in the past, people tended to purchase an annuity to fund their retirement and take their 25% tax-free cash allowance. Fixed interest, or bond funds as they are also known, invest in government gilts which are linked to annuity rates.

Newer pension schemes and lifestyle strategies effectively operate in the same way, but they have been altered slightly as retirement options have changed since introduction of Pension Freedoms in 2015. Fewer people are using their pensions to buy an annuity and instead go into income drawdown. While your provider will still typically move 25% of your investments into cash ten years before your selected retirement age, the remaining 75% of investments are likely to be held in funds that carry a greater degree of risk than fixed interest funds. This is because even if you do not retire until you are 65, with ever increasing average life expectancies, there is a chance that your pension will need to provide you with an income for the next 20, 25 or even 30 years. To avoid running out of money, a higher degree of risk is required in the hope of a higher rate of investment return.

What is the potential impact of staying in a lifestyle investment strategy?

As with default pension funds, the potential problem with lifestyle investment strategies is that they are not tailored to your individual circumstances and take a generic approach to investment.

With annuity rates currently being so low, people do not tend to purchase them anymore. If you do not buy an annuity and you’re heavily invested in fixed interest funds, your investments may not outperform inflation and you could see a large fall in their value, particularly during periods of high inflation.

Even if you are in one of the newer lifestyle investment strategies, there might be an impact on your pension value if you change your selected retirement age. For many people, plans change frequently due to changes in your life and career, but as lifestyle strategies are so intrinsically aligned to your retirement age, changing this at short notice could have a negative impact on your income during retirement.

I recently spoke to someone who is 54, invested in a lifestyle strategy and changed their retirement age from 65 to 60. Their exposure to fixed interest funds therefore increased dramatically at the start of the year at a point when inflation rose, and over a two month period, the value of their pension dropped from £125,000 to £115,000. Although it was perceived that fixed interest funds would pose less of a risk, ultimately this resulted in a significant loss.

When you are invested in a lifestyle strategy, you have no control over when the changes are made to your investments, unless you are changing your retirement age. Any changes are otherwise automatically applied on the pension plan’s anniversary date. As with any other type of investment, timing is everything and if you are moved in or out of a particular investment at the wrong time, this can have a substantial impact on your returns. If you were in a lifestyle investment strategy and were moved into fixed interest investments and cash between January and March 2020, you may have benefitted when the markets were falling. If, however, the same changes had been made 12 months later at a time when the markets were rising, you might have missed out on growth on your investment.

What are the advantages of a lifestyle investment strategy?

The key advantages of lifestyle investment strategies are that they are low cost and you do not have to make any investment decisions yourself. In this sense, they are also useful if you do not want to pay for professional financial advice. Your pension contributions remain invested in the stock market and you are likely to receive a higher rate of investment return than if you kept this money in a bank account, but remember that the value of investments can fall as well as rise and you may get back less than invested.

Some people do still buy an annuity with their pension when they retire, so if they are invested in one of the older lifestyle strategies, this may work well for them.

What do you need to do if you want to review your options?

If you are thinking of moving away from a lifestyle investment strategy, it’s worth speaking with your pension provider to see what other funds are available. Your provider 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. You will be expected to make your own decisions, which involves researching each fund carefully. For many people, this is not feasible, as they do not have the time, investment knowledge or the desire to do this.

Some employers provide their employees with annual pension clinics, where a pension adviser is on hand to answer any questions you might have about your investments. Without this, many people turn to a financial planner for help. A financial adviser will discuss your current situation along with your long-term aims and ambitions to find which investments are suitable for you.

Talk to Tilney

If you want to know more about your pension investments and options, contact Tilney. You can book an initial consultation online or call us on 020 7189 2400.

Book now

This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

The value of an investment may go down as well as up, and you may get back less than you originally invested.

Issued by Tilney Financial Planning Limited.


This article was previously published on Tilney prior to the launch of Evelyn Partners.