How pension “lifestyling” could influence your savings in the run-up to retirement

If you are in the run-up to retirement, one factor that may be crossing your mind is the value of your pension.

As your pension is an invested asset, its value can fluctuate depending on how markets are performing at any given time. This means that your pension’s value can go down as well as up – and crucially, if you witness a downturn just before you retire, you could crystallise those losses when you draw your pension.

One strategy many pension providers use to reduce the risk of significant losses before a person retires is “pension lifestyling”. This usually involves reducing the risk associated with your pension by transferring assets into a lower-risk portfolio in the few years before you are set to retire.

However, lifestyling can have adverse effects on your pension too. Like any investment choice, it comes with drawbacks that might have a long-lasting impact on your fund.

Read on to find out how pension lifestyling could affect your retirement fund in those final few years before you stop work, and why consulting a planner before your provider lifestyles your pension could be constructive.

Pension lifestyling is designed to keep your pension “steady” – but this process may not always work

If you are concerned about your pension fund dipping in value just before you retire, pension lifestyling is designed to minimise the risk of exactly that.

If your pension did see negative returns in the few years leading up to your retirement, you’d have a choice: wait until it rebalances before drawing it, or crystallise those losses by taking your pension as it is.

Understandably, neither choice is particularly attractive.

If you sit on your funds until the volatility ceases, you may have to remain working for more years than you’d hoped or use other savings to fund the first few years of your retirement. Alternatively, taking your pension at a loss means there’s no chance of regaining your lost capital in future.

So, it is easy to imagine how pension lifestyling could be a beneficial strategy for your pension – if it works as your provider hopes.

However, there is evidence that pension lifestyling doesn’t always work as planned and, as a result, retirees may lose valuable wealth from their pension just before they withdraw it.

For instance, a report from the Guardian in February 2023 used the example of Neil Brown, a 68-year-old retiree living in Oban, Scotland.

Brown’s Aviva pension had been through their “lifestyle investment programme” and, in theory, was at “low risk” of experiencing significant downturns if markets fluctuated. That’s because much of his fund had been moved from equities into lower-risk assets such as bonds.

Nevertheless, due to the slump in the value of bonds experienced in 2022, his pension saw a 20% dip that year – which, when combined with the 4% reduction in 2021, meant his pension was taken at a 24% loss when he retired.

This instance shows that while lifestyling can help protect your pension fund from market fluctuations, it is not a guarantee that your pension is safe from losses in all cases.

Lifestyled pensions can perform poorly in an era of high interest rates

One of the reasons pension lifestyling can be problematic is that often, bonds are considered a lower-risk investment asset. So, when lifestyling a pension, providers often transfer the fund’s wealth from equities into a bond-heavy portfolio.

When interest rates are low, bonds can perform very well, meaning a lifestyled pension could see positive returns and put the retiree in a fantastic position in time for retirement.

However, when interest rates rise, as they have done since the end of 2021, bonds typically decrease in value. Here in the UK, the Bank of England (BoE) has raised the base rate 11 consecutive times since December 2021, resulting in the rate increasing from 0.1% to 4.25%.

So, if you plan to take your pension very soon, it could be that the lifestyling process falters in light of these interest rate hikes. There are some ways to reduce this risk, including combining an annuity with lifestyling, as annuities tend to perform well in times of high interest.

Ultimately, though, whether pension lifestyling could benefit your pension wealth depends on your unique circumstances.

Your pension circumstances are unique, so working with a financial planner can help you determine if lifestyling may help your pension

If your pension provider(s) are likely to lifestyle your pension in the coming years, it is important to understand the potential benefits and drawbacks of this process.

Remember: most providers lifestyle pensions automatically unless you provide instructions otherwise. So, thinking about whether it is right for your wealth in advance of retirement is essential.

One thing you might struggle with when considering the pros and cons of lifestyling is: how do I know what’s best for my specific circumstances?

That’s where working with a financial planner can add immense value. Your pension is a unique portfolio of investments, and while understanding the lifestyling process yourself is incredibly helpful, a financial expert can review your specific needs and offer qualified advice.

We can assess your pension’s recent performance, look at when you want to retire, and give bespoke advice about whether lifestyling might benefit your fund. While past performance is not a reliable indicator of future performance, and your fund can go down in value as well as up, taking advice could protect your pension from losing value when you are on the cusp of retirement.

Get in touch

To discuss your pension options before you retire, email enquiries@prosserknowles.co.uk or click here to request a callback from one of our advisers.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.