It’s not often that you peek under a stone and find a hundred billion bugs. But that’s what happened when I looked into the scale of workplace pensions that are invested in default funds that use ‘lifestyling’.
Lifestyling is an investment technique where your portfolio is automatically shifted out of shares and into gilts and cash over the five to fifteen years before your selected retirement date.
We estimate that there could be £100 billion in these default schemes – and if people don’t take action they could lose out on tens of thousands of pounds of their retirement income.
There are a couple of reasons for using lifestyling, although both only really apply if you plan to buy an annuity.
First and foremost, lifestyling schemes take the risk out of your portfolio as you approach retirement. Shares are generally seen as the riskiest mainstream asset class, being more volatile but also tending to grow in value faster than government bonds or cash. Moving into the less risky (but less ‘growthy’) gilts and cash reduces the chances of suffering a sudden dip in pot value just before retiring.
Second, gilts and annuity rates have traditionally been seen as negatively correlated – in other words, they tend to move in opposite directions. So by holding a large chunk of gilts, the idea is if rates fall, the value of your portfolio goes up. So although you might get less bang for your buck, you’ll have more ‘buck’ to make up for it.
This is fine if you’re planning on buying an annuity.
But if you’re planning on living off your investments, then you could be in for a nasty surprise if your pension portfolio has been shifted out of high-growth shares to low-growth gilts and cash. When we looked at one model in our investigation, we found that the majority of portfolio growth happened in the final ten years before retirement.
A nasty surprise
With the new pension freedoms in force, it looks like most are choosing not to use their entire pension pot to purchase a guaranteed income for life. Instead, it would seem that most are opting to either live off their investments in flexible drawdown or use some kind of combination of annuity and drawdown to fund their later years.
We’re concerned that millions could be unknowingly sleepwalking into a less prosperous retirement. We’re calling on pension providers and the Financial Conduct Authority to do more to inform savers of their options and warn them of risks of not taking action – you can back our call by supporting our campaign for Better Pensions.
If you think you could be invested in one of these lifestyling schemes then contact your provider to discuss your options.
Do you know where your pension is invested? Could your pension be invested in one of these schemes? Have you heard from your pension provider at all?