Imagine this: you save hard your entire life, putting money aside in the hopes of being able to enjoy a decent standard of living in retirement. By the time you reach your 60s, you have amassed a sizeable pot.
But a month before you’re due to stop working, a devastating crash cripples global stock markets. Shares across the world collapse by 30 per cent or more and that pension nest egg you have been carefully nurturing for decades is wiped out.
Worse still, how badly your pension pot is affected may come down to an investment strategy you didn’t even realise you’d signed up for.
In the noughties, in a bid to avoid the devastating impact on people’s life savings that such a crash can cause, the pension industry came up with a plan.
“Lifestyling” is a strategy where the mix of investments in a pension starts to shift 10 to 15 years before a person’s planned retirement date.
Usually, the level invested in company shares – which typically deliver the best growth but are also the most volatile among mainstream financial asset classes – is reduced from about 75 per cent to perhaps just 20 per cent. This process is known as a “glide path”.
Shares, also known as equities, are instead exchanged for “safe as houses” assets such as Government bonds and cash.
The thinking is that while these safer assets would never provide spectacular returns, they would not suddenly lose a huge chunk of their value just before retirement.
The strategy has successfully cushioned savers from the impact of numerous crashes over the last quarter of a century, from the dot-com and 9/11 fallouts to the global financial crisis in 2008, the Covid pandemic slump of 2020 and the Liz Truss mini-Budget disaster in 2022.
But is lifestyling still fit for purpose in the current pensions landscape?
All change, please
The old lifetime model was inflexible but simple: work, save, stop work, buy an annuity – an annual pension income – enjoy retirement, die. But this was changed forever with the introduction of Pension Freedom reforms by then Chancellor George Osborne in 2015.
Under the new rules, pensioners could withdraw their entire pot in one go and splash the lot on a Lamborghini if they wished. More realistically, they could also leave their pension funds largely invested and draw down income, as and when they needed to.
That took away the “cliff-edge” fear but also raised a new question: if the bulk of the pot is to stay invested, then is the glide path still a good strategy?
Those who want their money to keep growing and to ensure it lasts for the rest of their lives could be better served by leaving it in the stock market rather than in bonds and cash.
Baroness Ros Altmann, a former pensions minister and campaigner on behalf of pensioners, believes lifestyling has been an “absolute disaster” for many savers approaching retirement.
“It is a classic example of how the pension industry likes to pigeonhole people. It thinks it knows best about people and it does not. It should not be taking people out of high return assets without properly asking them or telling them,” she says.
“You might get a letter from your pension fund saying it is going to ‘de-risk your portfolio’, but that means absolutely nothing to most people. You should not be made to give up on investment returns in your 50s and 60s if you hope to live to your 80s or 90s. That seems astonishing.”
Yet virtually every major player in the industry still pursues a default lifestyling approach, resulting in far lower returns at a crucial stage of the retirement journey.
Findings from a Department for Work and Pensions (DWP) survey found that annual investment returns for the largest default funds dropped from an average of 8.6 per cent for someone 30 years from retirement to just 3.6 per cent by the time retirement is just five years away.
For a saver with a £300,000 pot, that scale of slowdown could mean the difference between growth of £153,000 and growth of just £58,000 in the last five years before retirement. And returns could be even lower depending on how you are lifestyled.
Because it is not just the question of “to lifestyle or not to lifestyle”, it is about how long that glide path is and how your money is invested in that period.
Research from Corporate Adviser found that, on average, de-risking (moving from equities to bonds and cash) starts 13.9 years before retirement age. But the longest glidepath was 35 years and the shortest a mere six years.
Someone whose assets are de-risked too early could miss out on years of much-needed growth, while someone who is de-risked too late runs the risk of their pot falling just as they need it – exactly what lifestyling was designed to avoid.
Worse still, many savers do not get to choose which lifestyling strategy to use, because they save through a workplace pension scheme, where the fund provider is selected for them – that’s assuming they even realise they are being lifestyled in the first place.
How the pension funds stack up
Our own analysis of the returns of major pension default funds (the funds you are put into unless you choose otherwise) shows how their performance in the years up to retirement has lagged behind investment returns for younger savers.
Pensions analysts CAPAData ran the rule over some of the UK’s biggest default lifestyle funds and found that average annual returns were 5.4 per cent in the five years before retirement, compared with 8.1 per cent for younger savers who were still largely invested in equities.
But the length of the glide path is not the only determinant of how your pot will perform, as CAPAdata shows.
For example, the Scottish Widows PIA Balanced (targeting flexible access) fund starts lifestyling 12 years before retirement. The average return for the five years before retirement was 17.9 per cent. Someone with a £200,000 pension pot at this point could end up with £235,800.
The Aegon MT Lifepath Flexi fund begins lifestyling six years before retirement. Average returns in the five years before retirement are 19.3 per cent. The same saver could expect to retire with £238,600 – some £2,800 more than the Scottish Widows saver.
The People’s Pension Balance Profile begins lifestyling 15 years ahead of retirement, but still clocks in average returns of 20.4 per cent for the five years before retirement. The saver could retire with £240,800.
The Royal London Balance Lifestyle Strategy (Drawdown) fund starts lifestyling 15 years ahead of retirement and has delivered average returns of 25.4 per cent in the five-year pre-retirement period. A £200,000 pot could grow to £250,800.
The top performer among the funds we looked at was the Standard Life Sustainable Multi-Asset Universal SLP fund. It begins lifestyling 10-15 years ahead of retirement, and has delivered average returns of 31.1 per cent in the five years before retirement. A £200,000 pot could grow to £262,200.
What to know about your pension fund
So is lifestyling still appropriate for the majority of savers in the drawdown era? Most major pension companies and advisers insist it still has an important role to play in the run-up to retirement.
A Royal London spokesperson said: “We are supportive of lifestyling as a way to smooth customers out of risk assets ahead of pension access. We currently begin that journey 15 years from retirement.”
A Standard Life spokesperson said: “Standard Life lifestyle profiles typically have a glidepath of 10 or 15 years. The asset mix of the underlying funds used in each profile takes into account the glidepath length to deliver the target customer outcome.”
A Scottish Widows spokesperson said: “Scottish Widows lifestyles are designed to adjust investment risk as members approach retirement, based on how they are expected to access their pension savings…This helps members remain invested in a way that reflects their savings journey without needing to make regular investment decisions themselves. Our lifestyles begin de-risking from 12 years to retirement.”
For savers, the most important thing is to understand what strategy their pension fund takes and whether it is appropriate for how they plan to access their pot.
The actual returns you will achieve will depend on a host of factors including charges, performance and the underlying investment mix, says pensions expert Daniela Silcock, of research consultancy DSPR.
Stuart Lamont, a director and investment manager at RBC Brewin Dolphin, says the best approach for savers is a proactive one. Check in with your provider exactly when and what kind of lifestyling strategy is being pursued. He says: “I would encourage everyone to check how their pension is positioned, look at it once or twice a year, and if you are unsure about anything, reach out, seek advice.”
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