The Best And Worst Of Lifestyle Pension Funds

The Best And Worst Of Lifestyle Pension Funds
Underwater by Andy Deitsch. Why?

It seems millions of people who invest in Lifestyle Pension Funds are blissfully unaware they may run out of money in retirement

A Report On Lifestyle Pension Funds Shows That Accepting A Small Increase In Investment Risk Can Make A Remarkable Difference To How Long Your Money Might Last

Lifestyle Pension Funds Aim To Protect Your Money

Savers who invest in Lifestyle Pension Funds could be failing to take on enough investment risk to see them through retirement.

Lifestyle Pension Funds are designed to ‘lock in’ accumulated investment growth in your retirement pot as you get closer to your retirement date, and throughout your retirement.

Some pension providers offer specific Lifestyle Pension Funds.  Others may have a lifestyle option that uses their mainstream funds to achieve the same process.

The Principles Behind Lifestyle Pension Funds

When you have a long period before you intend to draw your retirement benefits, you can afford to take a higher degree of risk with your money.

As you get closer to your retirement date, typically five to 10 years before, you’re automatically switched from your riskier Lifestyle Pension Funds into less risky assets, such as cash or fixed interest.  These asset classes are less likely to be affected if the investment markets fall sharply, helping to protect your earlier investment growth during the period up to your retirement and beyond. 

Lifestyle Pension Funds may be appropriate for you if you’re intending to purchase an annuity when you retire, to provide you with an income for the rest of your life. 

But Lifestyle Pension Funds are unlikely to be suitable if you intend to keep your retirement pot invested and to use income drawdown to provide you with an income in retirement.  This is because moving your pension fund to lower risk assets is likely to reduce the investment returns that you’ll receive.

How Lifestyle Pension Funds Could Work Against You

In a recent report, the discretionary fund manager, Seven Investment Management, has questioned whether the assumptions of Lifestyle Pension Funds are still relevant.

It estimates that more than £100 billion in pension savings are invested in Lifestyle Pension Funds.  It calculates this could create the risk that millions of people could run out of pension money towards the end of their lives.

By way of illustration, two investors were compared.  Each one saved an average of £7,500 a year from the age of 30 to 60.  One investor chose a 'moderately cautious' portfolio targeting a return of 4 per cent a year.  The other investor accepted a little more risk, investing in a ‘balanced’ portfolio targeting a return of 5 per cent a year.  They each drew £22,000 a year in retirement.

The calculations revealed the first investor would run out of money at age 86.  But having accepted a little more risk, the second investor would still have around £275,000 in his pot, and could continue to draw income beyond age 100.

This clearly demonstrates how a very small increase in investment risk could make a remarkable difference to the outcome when pension pots are at their greatest, primarily due to the effects of compound interest.

Here’s the full article on Lifestyle Pension Funds.

An Alternative To Lifestyle Pension Funds

With people living longer, Lifestyle Pension Funds may not always be an appropriate solution.  By definition, they offer a broad brush approach.  It can often be more effective over the longer term to select funds in line with your personal circumstances and your attitude to risk and capacity to loss, and review them on a regular basis.

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