Does Pension Lifestyling Need A Reality Check?
What Is Pension Lifestyling?
Pension Lifestyling aims to gradually reduce any investment risk in your pension as you approach retirement, preserving the purchasing power of your fund and protecting it from unexpected market falls just before you retire.
This strategy is common in many old-style traditional pension and Workplace Schemes.
On the face of it, it is a prudent approach.
However, traditional retirement planning has been based on a pre-determined retirement date when a pension fund would normally be exchanged for a fixed income, known as a pension annuity. Pension Freedoms, introduced in 2015, has completely shifted the retirement landscape and provided individuals with the now more mainstream option of a
flexible retirement using Income Drawdown.
This has meant there is no longer a big focus on one key future date or a need to reduce risk as you approach it. Of
course for those who are likely to take the annuity route, a lifestyle strategy could be very beneficial.
The use of Income Drawdown has potentially increased the investment time horizon by 20-30 years past the once
all-important retirement date, therefore a more suitable, longer term investment strategy is needed.
Individuals in a Lifestyling strategy before and into retirement could be at risk of substantially lower returns and retirement income. It is expected that an investment approach may differ once an individual begins to access their pension, which could include a reduction in risk but should not lead to a wholesale reduction in risk.
Is The Risk Really Reducing?
Not only is the move to perceived lower risk assets likely to impact longer term returns, but there is some question as to whether the lower risk assets are as low risk as first thought.
The risk reduction usually results in moving out of the stock market and into government or corporate bonds, essentially a loan to the government or a company. The value of such bonds can be negatively influenced by rising inflation and rising interest rates. In addition, during periods of economic downturn, companies issuing the corporate bonds can default on payment.
Is There An Alternative?
With people living longer, Lifestyle Pension Funds may not always be an appropriate solution, potentially offering a broad-brush approach. It can often be more effective over the longer term to devise an investment strategy in line with personal circumstances and attitude to risk and capacity to loss.
With a longer time horizon and no definitive end date, the importance of a well-structured financial journey has never been greater. This should include regular contact with your adviser to confirm on-going requirements using cash-flow modelling to help navigate through changing needs and economic cycles.
Even during Income Drawdown, an individual is still likely to have some concerns over whether their pension fund will meet their needs but also what happens if their fund falls dramatically.
One scenario would be the ability to take a little more investment risk so to grow your pension fund over a sustained period but to also have some form of protection so you know that your fund cannot fall below a certain value.
If this is an approach that may interest you, speak to your adviser about available Capital Protection Portfolios which could be used as part of your retirement strategy.