When you first joined your employer’s pension scheme, you were mostly likely invested in the providers default fund or asked whether you want to go in a low, medium or high-risk pot.
These default pension investing options often have a Lifestyling strategy applied to them.
The basic principle of lifestyling is that as you approach retirement, the risk level you take in your pension reduces. This is due to the fact you are getting closer to needing the money to fund your retirement and don’t have time to recover from major drops in value.
The main way of ‘reducing the risk’ is to sell investments in more risky assets such as company shares and to buy traditional low risk assets such as bonds and Gilts.
The lifestyling process usually happens slowly over a period of 15 years until you reach the stated retirement age in your pension plan. This retirement date doesn’t have to be when you do retire, it’s just the date that was either selected for you or by you when you first joined the scheme.
Once you hit that age, you’re then in the low-risk portfolio until you withdraw all the money, buy an annuity, or change the investments manually (yourself or through an adviser).
Downsides of lifestyling
The most popular option at retirement, currently, is drawdown. When in drawdown, you generally withdraw money from your pension as and when you need it, and the remaining amount stays invested. This means that your pension money can stay invested until you’re well in to your 80’s and 90’s.
This means that if you’re in a plan that implements lifestyling, you could be invested in a very low risk environment for 30+ years.
Having your entire pension pot in a very low risk portfolio for decades may not be suitable.
A couple of weeks ago, the UK had a ‘mini budget’ that caused the bond and gilt market (the so-called low-risk, safer investments) to drop substantially. The Scottish Widows Pension Protector fund has, at the time of writing, lost 44.44% over a 1yr period. This is not what someone close to retirement can easily manage.
If you’re approaching retirement and your pension is coming towards the end of a lifestyling process, the value of your pension most likely also dropped.
Please give Oakworth a call on 01977 600020 to see how we can keep your retirement plans on track.