Lifestyling in Your Workplace Pension: What It Is and How It Affects Your Retirement
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Planning for retirement can feel overwhelming, especially when faced with decisions about investments, risk levels, and future income. Many workplace pension schemes offer a feature called lifestyling, designed to automatically adjust how your pension is invested as you approach retirement.
But how does lifestyling actually work? And is it the right strategy for you? In this blog, we’ll break down the concept, follow an example of an employee’s pension journey throughout their working life, explore the advantages and disadvantages, and discuss why financial advice can be valuable.
What Is Lifestyling?
Lifestyling is an investment strategy used in many company pension schemes to gradually reduce investment risk as you get closer to retirement.
When you’re younger, your pension is usually invested in higher-risk assets such as equities (stocks and shares), which have the potential for greater growth over time.
As you approach retirement, the strategy automatically shifts your investments towards lower-risk assets like bonds and cash, aiming to protect the value of your pension from market volatility.
This transition is designed to help ensure your pension fund isn’t significantly impacted by market downturns just before you start withdrawing it. However, while lifestyling is often a default option in workplace pensions, it may not always align with your personal retirement goals.
Lifestyling in Action: A Pension Journey
Let’s consider the example of Emma, an employee enrolled in a company pension scheme with a lifestyling approach. She aims to retire in line with her forecast state pension age of 67.
Early Career (Ages 25-40): Growth Stage
At 25, Emma is automatically enrolled in her workplace pension. Because she has several decades before retirement, her pension is invested mainly in equities.
· Equities are more volatile but offer higher growth potential over the long term.
· Any short-term losses in the stock market are less concerning because Emma has time for her investments to recover.
· Over the next 15 years, she contributes consistently, potentially benefiting from pound cost averaging and compounding growth
Mid-Career (Ages 40-55): Transition Stage
As Emma enters her 40s, her pension provider starts gradually shifting some of her investments from equities to bonds and other lower-risk assets.
· The aim is to reduce risk exposure while still allowing for some growth.
· A mix of bonds and equities provides a balance between stability and potential returns.
· Emma is still over a decade away from retirement, so some market risk is acceptable.
Pre-Retirement (Ages 55-67): Preservation Stage
From age 55 onwards, Emma’s pension shifts more heavily towards bonds, cash, and lower-risk investments.
· By the time she’s a few years away from retirement, a significant portion of her pension may be protected from stock market fluctuations.
· The idea is that if markets fall just before she retires, she won’t experience a dramatic drop in her pension’s value.
· By 67, her pension is mainly in lower-risk assets, giving her a predictable and stable fund to start drawing from.
Not all Lifestyling Strategies are Equal
As lifestyling has become a common feature in workplace pensions, providers have adapted their approaches to suit different retirement outcomes. While many traditional strategies aim to transition your pension into 25% cash and 75% fixed interest securities, such as bonds, in preparation for purchasing an annuity, others are designed to support Flexi-Access Drawdown by maintaining a higher allocation to equities.
This is why it’s crucial to consider your likely retirement strategy, potentially decades in advance, to ensure your pension’s lifestyling approach aligns with your future plans. Investing in a different strategy could mean your investments aren’t positioned effectively for how you intend to access your pension savings.
Advantages of Lifestyling
· Lifestyling can be beneficial, particularly for those who prefer a hands-off approach to investing. Some key advantages include:
· Automatic Risk Management, the strategy gradually reduces investment risk as you get older, without you needing to make manual adjustments.
· Potential Protection from Market Volatility, By shifting to lower-risk assets near retirement, lifestyling may help prevent your pension from suffering significant losses just before you start withdrawing funds.
· No Investment Knowledge Required, Lifestyling is typically built into default pension schemes, making it a straightforward option for those who are unsure about managing their own investments.
Disadvantages of Lifestyling
Despite its benefits, lifestyling isn’t always the best option for everyone. Here are some potential drawbacks:
· One-Size-Fits-All Approach – Lifestyling assumes everyone will retire at a fixed age (often 65-67), which may not align with your personal plans. While this can be changed, many plans assume a default retirement age which employees rarely realise they can amend.
· Potentially Lower Growth – As lifestyling moves your investments away from equities, you may miss out on growth opportunities in your later working years.
· Not Ideal for Drawdown – If you plan to delay accessing your workplace pension, potentially relying on other pension plans or savings initially, then shifting too heavily into bonds and cash may not be the best approach.
· Market Timing Risks – Lifestyling moves you out of equities at predetermined points, regardless of market conditions. This could mean locking in lower returns if equity markets happen to be performing well.
Alternative Approaches & The Role of Financial Advice
Lifestyling may be suitable for some, but it’s not the only option. Depending on your retirement goals and available options with your workplace pension, you may be able to amend your lifestyling strategy, switch it off, or consider using alternative funds to invest within the plan
Final Thoughts
Lifestyling in a company pension is a convenient, risk-reducing investment strategy that adjusts over time, protecting your pension savings as you near retirement. While it offers simplicity and security, it may not be the best fit for everyone.
Understanding how your pension is invested is key to making informed decisions about your retirement. If you’re unsure whether lifestyling is right for you, seeking professional financial advice can help you build a strategy that truly meets your needs.
If you’d like to explore your pension options further, get in touch with us today. Your future is worth planning for!