Mind the gap between retirement and pension losses from lifestyle funds

Many of us with workplace pensions may be largely unaware as to the fund choice of those particular types of plans, with default being the fund selection choice for most arrangements. Such plans, that are often set up as workplace pensions are based upon a selection of “Lifestyle” or “Working Strategy” funds.

Put very simply, such pension plan arrangements are designed to “grow” the pension pot in the early years –i.e. through your 20s, 30s and 40s through diversification in investments in different asset classes, but later focussing on a more cautious approach as retirement gets closer in people’s 50s and 60s.

In theory the strategy seems sensible –invest in a diverse range of assets during the formative years of investment growth when building a pot is important but when retirement approaches take a more cautious route to investment choices, potentially lowering risk with the aim of maximising profits on the growth from earlier years.

In practice, however, the strategy is largely inflexible in the face of market down-turns and more importantly the objectives of the retiree.

Market down-turn

The impacts of Covid, the war in Ukraine and more recently the Truss Government’s mini- budget, have resulted in impacts on pension savings with no fund selections remaining unscathed. However, where reliance on what were traditionally relatively “safe” investment choices e.g. bonds, which performed well in a market of low inflation and low interest rates, the falls in value have been, in some cases, double that alternative fund selection choices.

Typically, a Lifestyle Fund would previously rely on relatively safe stock such as bonds to assist retirees with a cautious approach to their retirement date; however with the acute down-turn in the market this strategy has failed to produce the pension pot for people that could reasonably be anticipated in previous times.

The chart represents the different channels of investment in a Lifestyle Fund and the various loss and growth points. Investment in cash, equities and multi-asset funds lost value over the past 10 months, but not at such a rate as the losses seen in the Lifestyle Fund portion of the investment.

Objectives of retiree

Around 6 years from retirement, people start to think what they would like from it and how they would like to live during this new chapter in their lives.

The most important thing to consider at this point is that not everyone wants to live the same retirement; people all have different objectives and different financial plans. It is not just a simple case of completing the saving into a pension pot and then looking to take an income. It requires a pro-active plan and careful management.

The dip in pension pots and in particular many workplace pension funds invested in “Lifestyle” or “Working Strategy” funds needs considering years before retirement, particularly if the pension is deferred.

We recommend that all with a workplace pension who have not pro-actively selected funds, believe the fund choices to be defaulted or who know they are in Lifestyle or Working- Strategy funds, seek advice about options.