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: