Many pension schemes use a process known as "lifestyling" or a "lifestyle strategy" to automatically adjust how your pension is invested as you approach your selected retirement age. The idea behind this approach is relatively simple: when retirement is many years away, your pension may be invested more heavily in assets such as equities, which have the potential for higher long-term growth but can be more volatile. As retirement gets closer, the pension gradually moves into investments that are typically considered lower risk.

For many years, lifestyling was designed around the assumption that most people would use their pension savings to purchase an annuity at retirement. As a result, pension providers often switched funds into bonds and cash-like investments in the years leading up to retirement.

While this may have been suitable for some investors, retirement choices have evolved significantly. Today, many people choose income drawdown, phased retirement, or other flexible options instead of buying an annuity.

Changes Can Happen Without You Realising

One issue is that these automatic fund switches can happen without members fully understanding what is taking place. If you joined a workplace pension many years ago, your pension may already be following a lifestyle strategy, and the investments held today could be very different from those originally selected. In some cases, investors are surprised to discover that a substantial proportion of their pension has been moved into lower-risk assets, potentially affecting future growth prospects.

The Risks of Being Too Cautious

While reducing investment risk can help protect pension savings from sharp market falls, becoming too cautious too early can also have drawbacks. People are living longer than ever, and retirement can last for several decades. If a pension is moved heavily into lower-growth assets many years before retirement, there is a risk that investment returns may struggle to keep pace with inflation, potentially reducing purchasing power over the long term.

For those who are not planning to access their pension immediately or who intend to remain invested throughout retirement, a lifestyle strategy may no longer be aligned with their objectives. This highlights the importance of ensuring that any automatic investment changes still reflect your individual plans.

The Risks of Being Too Adventurous

Equally, not all pensions automatically reduce investment risk as retirement approaches. Some individuals may remain invested in higher-risk funds right up to, and throughout, retirement. While this may offer greater growth potential over the long term, it can also expose pension savings to increased market volatility at a time when access to the funds is becoming more important.

A significant market downturn shortly before retirement could have a substantial impact on the value of a pension pot, particularly if benefits are due to be taken in the near future. Recovering from losses may be more challenging when there is less time available before withdrawals begin.

Importance of speaking to a Financial Adviser

Regular reviews are important to ensure your pension remains aligned with your goals. If you are unsure whether your pension is subject to a lifestyle strategy, or whether the current investment approach remains suitable, it may be worthwhile speaking to a financial adviser.

A professional review can help you understand how your pension is invested today and whether any changes should be considered in light of your retirement plans.

If you would like to discuss this further, please contact us at [email protected] and a member of the will get back to you.

Alternatively, please pick up the phone and call on 01935 848764.