Lifestyling
Lifestyling is an investment strategy which provides automatic switching of your pension savings into another fund, or funds which generally have a lower risk profile or aligns your pension savings more closely to your plans for using these, as you get closer to your planned retirement age.
What is the purpose of lifestyling?
It aims to align your pension savings with your plans for using them, and help you reduce the risks you face with your pension savings as you approach your retirement age.
What risks could lifestyling help you manage?
Different pension plans offer different lifestyling options. The one you choose can help you manage several types of risk as you approach retirement, depending on the lifestyling option chosen:
- May help reduce the risk of short‑term falls in your pension value as you get closer to retirement by gradually moving your money into lower‑risk investments.
- May help align your pension savings with how you plan to use them at retirement.
- May help protect your pension savings from inflation. As the cost of everyday items like food and fuel increases, the value of money can fall over time. Lifestyling may include investments designed to help protect against these effects.
Often, a lifestyle strategy will combine several of these features. However, while lifestyling aims to manage risk, your pension can still go down as well as up, and you may get back less than you put in. It’s important to think about how you plan to use your pension savings when choosing a lifestyle strategy.
- Switches happen automatically, so regular pension savings reviews can focus on whether the lifestyling option chosen is still appropriate.
- Depending on your lifestyling option such as targeting a guaranteed income for life (also known as an annuity), your savings may be moved into an investment type (such as UK Government Bonds) that has a closer relationship to how a pension income is calculated. Therefore, if the value of that type of fund goes down, the cost of providing a pension income could also be expected to reduce. If on the other hand, the cost of buying a pension income increases, then that fund would also be expected to increase in value as well.
- When you take your benefits, current tax rules allow you to usually take up to 25% of your pension savings as a tax-free cash sum. Where you have chosen a lifestyle aimed at providing a lump sum on retirement the lifestyling process may move part of your money into a cash or deposit fund to help make the amount of that lump sum more predictable for you as you approach retirement and help protect it from falls. Remember though, tax rules can change in the future and you may need to pay tax depending on your circumstances and the options you choose at retirement. Once you take tax-free cash from your pension, it cannot be cancelled or reversed..
- You can change your mind at a later date. For example, if your circumstances change: And lifestyling is no longer appropriate to you, you can move your pension savings out of the lifestyling option and make your own decision about which funds you use. You change your plans on how to use your pension savings and you might want to change the lifestyle strategy to one which is more closely aligned to your plans.
The design of the lifestyle option is based on our long-term or more than 10 years expectations of how funds might perform. As it is a fixed strategy, it doesn't take account of changes in economic or market conditions that might occur in the future.
As a result:
- Your savings may be moving into a fund, or funds, that could prove to be a poorer short-term investment option than your current fund or funds.
- Your savings, depending on your lifestyling option such as targeting a guaranteed income for life (also known as an annuity), may be moving into a fund that is closely linked to pension income rates (or annuity rates) at the time when these rates are not at levels that meet your needs.
- The available lifestyling option may not exactly match your needs. For example, it may be designed to help match to pension income rates - or to help make a possible lump sum at retirement more predictable. You may not be saving towards those aims in the same proportions that the lifestyling option is aiming to deliver.
- Lifestyling works towards your originally planned retirement age. If you decide to take your benefits before or after that age then lifestyling is not working towards your actual retirement date, and funds may not be switched at the right time to meet your aims.
- Lifestyling is designed to suit the needs of most people saving for their retirement and may not be suitable for your particular needs or attitude to the risk you are prepared to take and return you expect.
- Your personal circumstances may change and so your lifestyle option may no longer be right for you.
What are the main investment risks which lifestyling may help with?
It is important to consider investment risks to you based on your circumstances. The main risks are:
- Volatility Risk - The chance of short-term fluctuations, in the value of your pension savings as events in financial markets cause the value of investments to go down as well as up.
While this can happen at any time, we believe it's likely to be most important when you are close to retirement (when you have less opportunity to make up any losses) or when planning changes to your funds.
- Inflation Risk - The risk that the value of an investment does not grow quickly enough to keep up with inflation and so the buying power of your money is eroded.
We believe this risk is likely to be important to you throughout the time you are invested.
- Conversion Risk - When you choose to take your pension benefits, you could use your pension savings to get an income. The income you receive will depend on both the value of your pension savings and the cost of turning your savings into an income. This creates the risk that the value of your pension savings does not move in line with the cost of providing you with an income.
We believe this conversion risk is likely to be important to you when you are approaching retirement.
Can you give me an example?
Investor X - does not use lifestyling
- The investor takes out a pension plan with 30 years to go to retirement.
- They decide to invest in Fund A, which they believe has the potential to grow strongly over more than 10 years or long-term, although it is likely to offer more risk compared to other funds in the short-term.
- With ten years to go the investor decides to move some of the pension savings held in Fund A into Fund B.
- Fund B is expected to be less risky and provide a more predictable return than Fund A, but that means it is expected to produce a lower return.
- In the years running up to retirement the investor sends a number of instructions to the pension provider to gradually move more and more of the pensions savings from Fund A into Fund B.
- Timing of the investment switches is dependent on the investor issuing instructions to change.
Investor Y - uses lifestyling
- The investor takes out a pension plan with 30 years to go to retirement.
- A lifestyle option is available using Fund A, which they believe has the potential to grow strongly over more than 10 years or long-term, although it is likely to offer more risk compared to other funds in the short-term.
- As a lifestyle option has been selected their pension savings will gradually move from Fund A to Fund B over the 10 years leading up to retirement. Fund B is expected to be less risky and provide a more predictable return than Fund A, but that may mean that it is expected to produce a lower return. This gradual movement into Fund B will start automatically unless the investor confirms that their lifestyle option should be cancelled.
An example of how this might work:
Years till planned retirement age | Fund A (% of money invested) | Fund B (% of money invested) |
|---|---|---|
10 | 100 | 0 |
9 | 90 | 10 |
8 | 80 | 20 |
7 | 70 | 30 |
6 | 60 | 40 |
5 | 50 | 50 |
4 | 40 | 60 |
3 | 30 | 70 |
2 | 20 | 80 |
1 | 10 | 90 |
0 | 0 | 100 |
Summary
In this simple example the end impact of both approaches could well be roughly the same. But, there are differences in what is required for each investor:
- Investor X has had more control of when changes happen, which could be an advantage if the timing of the changes works in the investor’s favour, but they do need to make the investment changes themselves.
- Investor Y does not need to remember to give instructions to make changes to their investments as they approach retirement, but has no control on the exact timing of changes.
Lifestyling is an option that appeals to, and is valued by, many investors. But it doesn't appeal to everyone and some people prefer to have more control over their investment planning as they approach retirement.
Further Information
- How do I contact you if I want to discuss further?
- I don't have a financial adviser but I'd like to find one to discuss this with?
- Where can you find more information about specific lifestyle options?
We offer a number of different lifestyle options depending on the pension plan you invest in, or are considering investing in. Further information is available in your plan documentation. For example, your Fund Guide will provide you with more information on specific lifestyle options.
Contact us
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If you can’t find what you’re looking for, or need more help, there are a number of ways you can get in touch.
