Retirement savers may see millions of pounds knocked off their values because their workplace pensions automatically put their money into less risky funds.
New research shows that almost every retirement saver is switched into a default lifestyle fund as they approach retirement age.
The report The Future Book: Unravelling workplace pensions, by the Pension Policy Institute and published for Columbia Threadneedle Investments, showed that 99.7% master trust members and 94% of group personal pension members are in a default fund.
Daniela Silcock, head of policy research at the PPI, said most default funds in master trust and GPP schemes are lifestyled.
“Some of those planning to continue investing their savings after retirement might benefit more from a fund which prioritises growth even in later years,” she said.
What is lifestyling?
“A lifestyle fund is likely to meet the needs of those who plan to convert their savings into an income at retirement through, for example, an annuity.”
Lifestyling is a strategy designed to reduce the risk of a fund losing money just before retirement.
Instead of investing in stocks, shares and other volatile assets in the years before retirement, the money is switched into investments such as cash or fixed interest bonds.
“Lifestyling may be suitable for you if you’re intending to purchase an annuity when you retire, to provide you with an income for the rest of your life,” says the Pensions Advisory Service.
“It’s unlikely to be suitable if you intend to keep your retirement pot invested and to use income drawdown to provide you with an income in retirement. This is because moving your pension fund to lower risk assets is likely to reduce the investment returns that you will receive.”
Solution for low-risk investors
Worries about how lifestyling may reduce the retirement savings of millions of workers has triggered consumer watchdogs the Financial Conduct Authority to instruct financial advisers and pension providers to consider if the strategy is suitable for savers.
Chris Wagstaff, head of pensions and investment education at Columbia Threadneedle Investments, said: “People with low risk appetites and low incomes are more likely to be put off by losses incurred during the early stage of pension saving and opt out.
“It is crucial that they are provided with an effective default option that is unlikely to incur losses early in their savings journey, if we want to avoid compounding the nation’s long-term savings problem.”
