Most employees are members of a workplace pension scheme and the majority of those I have come across in my 20-year career use the default investment fund and include the lifestyling option.

So what is lifestyling?

To those not aware of lifestyling, this is the automated process of de-risking the investments in the pension in the run up to the selected retirement age. This process has been in existence for many years and is designed to protect the policyholder from short term volatility just before they purchase a retirement income.

In the past the majority of policyholders have purchased an annuity on reaching retirement i.e. securing a guaranteed income and giving up access to the capital value of their pensions. As the annuity purchase is a final decision lifestyling is designed to try and ensure the value of the pension doesn’t suffer a late drop in value just before the purchase date.

The way this is usually done is to sell down perceived risk assets such as equities and property and to buy government Gilts (loans to the UK government) and hold cash. Loans to the Government are deemed one of the lowest risk asset classes to hold and should see the holder receive a small amount of income from the Government for the loan being made.

Client scenario

Recently, I was at a pension surgery I run for a farming business I work with and was speaking to one of their managers about their pension. They reach age 65 in late 2024 and their pension policy has lifestyling linked meaning they have been automatically de risking over the past few years.

I last met this individual in 2021 and they were comfortable with this automated process as annuity purchase was their likely path and therefore capital preservation of great importance to their retirement plans. When we met in May it was an emotional discussion as the lifestyling strategy had not only failed to meet their objective it has actually resulted in meaning they have a difficult decision to make.

Over the past 12 months the Investment Association Gilt index has returned performance figures of -15.44%. The lifestyling choices of this particular pension had underperformed this and the individual was almost 20% down over the past year. Below is a chart of the Gilt index return illustrating the volatility suffered.

The individual in question has worked hard their entire life, saved sensibly and now due to the lifestyling effect their pension is unlikely to provide the income they had once hoped to enjoy.

Even the bounce in annuity rates doesn’t compensate for the capital drop!

They are now left with 3 choices:

1. Work a little longer.
2. Accept a lower income level.
3. Change investment strategy to try and recover some of the ground as Gilts are unlikely to provide a bounce to the required level in the timescales available.

I have long been lifestyling sceptical in pensions, with pension freedoms it is, in my opinion, far better for the individual to be involved in any decision about their investment choices and for them to have an element of control away from a computer that won’t factor in life events and changes.

Markets have been challenging for many over the past 12 months or so but for those with these built in protections I would urge you to think further and ensure this is what you want.

Thanks for reading and #enjoythejourney