If you’ve never heard of lifestyling before, you’re certainly not alone. But it’s nothing to do with how you live your life or the clothes you wear; it’s intended to provide a way to reduce the chances of your pension fund plummeting in value just before you retire.
Most of us will remember only too well that tumbling stock markets in October 2008 were particularly bad news for you if your pension fund was mostly invested in shares or share-based funds and you were getting near to retirement (unless you were in a final salary pension, when the employer takes on all the risk). Lifestyling can help ensure that the risk you take with your pension savings reduces the closer you get to retiring. However, it could also mean that you miss out on higher returns because you’ve ‘de-risked’ too early, leaving you worse off in retirement
Here, we explain how it works, why it isn’t without downsides, and some of the things you need to consider in the run up to retirement.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
How lifestyling works
If your pension fund is invested in a lifestyling fund (sometimes called a ‘lifestyling option’):
- Your money is gradually moved away from shares to lower-risk investments (normally a mixture of bonds and cash-based accounts).
- The process normally starts between 15 and five years before you reach retirement (this will depend on the provider and the fund).
- Not all lifestyling funds or options are the same. Some funds start moving money earlier than others and some move money to lower risk investments than others.
Lifestyling will normally be available on work-based defined contribution pensions and group personal pensions. Stakeholder pensions have to offer lifestyling, although you don’t have to use it, and other types of pension may offer it as an option. Check with your pension scheme, independent financial advisor or pension company.
You don’t normally have to choose the lifestyle option when you first take out your pension, you should be able to move your money into a fund that offers lifestyling right up until just before it starts switching into lower risk investments. Pension providers should let you switch to a lifestyling fund free of charge, although it’s possible you may be charged a fee.
Pros and cons of lifestyling
Although lifestyling definitely has its advantages, because it means you’re not exposed to the volatility of the stock market at a time when you should be reducing your risks, it’s not a fool-proof system and many independent financial advisors don’t recommend it.
Pros
- Your money is moved to lower risk investments as you approach retirement without you having to do anything about it.
- Your exposure to the ups and downs of the stock market is reduced, hopefully avoiding the risk of your pension savings dropping in value just before you need them.
Cons
- You don’t have control over when your money is moved. A lifestyle fund could move some of your money (typically up to 20%) out of shares when the stock market is at its lowest; which is normally the worst time to sell. If the stock market then rises, you’ll have missed out on those gains as well.
- It’s a bit of a ‘one size fits all’ approach. Even though there are different types of lifestyle funds – ones that move money into safer investments at an earlier stage and others that take a slightly riskier approach – your own views on risk and investing may mean you’d be better off with something completely different.
Alternatives to lifestyling
Lifestyling is an option, but it’s not a flawless system. Some believe it can lull investors into a false sense of security. Your other option is to leave your money where it is, or to move your savings into a fund which matches your approach to risk and your investment timeframe.
Your starting point should be to find out what your pension is invested in at the moment. You can learn more about this in our article Where is my pension invested? Ideally it shouldn’t all be invested in one fund (or in a couple of funds that have a similar investment approach). Instead of lifestyling, you may be better off making sure your pension fund is spread throughout a wide range of different types of investments. Take advice before making any changes if you’re not sure which pension investments are likely to be right for you. Read our article 9 tips for managing your pension in difficult times for more ways to potentially increase your retirement income, and protect your pension savings from turbulence.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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