What is Lifestyling?

You may not be aware that your company pension scheme reduces your risk exposure as you get older. Here's what you need to know about lifestyling

James Gard 20 September, 2021 | 10:09AM
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What is Lifestyling?

If you are enrolled in a company pension, your provider will automatically switch you into less risky assets the closer you get to retirement. This is the standard way that company pensions are managed if they are defined contribution schemes.

Does it Offer Me a Certain Lifestyle?

No, the term is slightly misleading in that “lifestyle” in this context really means “age” or your stage in the life cycle. Lifestyle funds don’t guarantee a certain standard of living or even guarantee that your pot will be worth a certain amount when you retire. 

What’s the Thinking Behind It?

Equities are seen as more volatile and risky assets than bonds and cash, so your exposure to the stock markets is reduced as you get older. Someone with 100% in equities approaching retirement could see their pension pot shrink significantly if the market crashes, as it did in spring 2020. Your retirement plans could be turned upside in this scenario.

On the flipside, if you are many decades away from retirement, you should be able to take more risk, especially as equities have historically offered better returns than bonds and cash.

Is Lifestyling a One-Stage Process?

Your scheme may be “lifestyled” at different points. Furthest from retirement, you may be enrolled in a default growth fund with the highest equity exposure. Then the allocation will shift at 20 years from your target retirement date to lower risk assets, then shift again at 10 years from this date. As you hit retirement your equity exposure will be minimal.

Are Bonds Still Low Risk?

Bonds have been a key part of the de-risking process as they are known to be less volatile than equities and pay a reliable income. But bond prices are high by historic standards and yields very low, particularly for the least risky assets like gilts. Recently we've looked at the case for a 60/40 portfolio, which mixes 60% in equities with 40% in bonds. Many retirees choose to go back into the stock market in search of better returns - and in recent years will have been rewarded for taking on this higher risk.

Do I Have a Choice?

Many company pension providers are offering scheme members alternative investing options, based on their approach to risk: you can choose a more adventurous (and risky) option than the default if you wish. But you are still choosing from within the provider’s range. Self-invested Personal Pensions (Sipps) give more freedom for those who want to choose their own funds, shares and risk levels.

Is it Right for Me?

Every individual’s financial situation is different, so take financial advice if you want to make sure it is right for you. Peter Chadborn, an IFA at Plan Money, says that people can take too little risk, as well as too much. For example, being enrolled in a pension scheme may help the risk-averse to a better outcome than if they’d chosen their risk levels themselves. “Lifestyling can nudge people to be adventurous when they should be adventurous,” he says. It is also a helpful “default” option for those with no interest in the nuts and bolts of investing. He says that people usually become more engaged in how their pension works and what their options are when they hit 50.

Where Can I Get More Information?

Pension providers can explain which funds you are invested in and what the value of your pot could be near your retirement age. They can also give you an explanation of what the alternatives are to your default fund.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard  is content editor for Morningstar.co.uk