Millions of retirement savers face a less comfortable retirement because their workplace pensions cannot adapt to flexible freedoms.
Workplace pensions with a default investment strategy of ‘lifestyling’ could lead to savers losing tens of thousands of pounds.
Lifestyling was developed to manage workplace pensions designed to generate a fund to buy an annuity, but times have moved on and the strategy can damage rather than enhance modern pensions.
To lifestyle a pension, fund managers switch investments from shares to cash and bonds over the years leading to retirement.
The intention is to ‘derisk’ the pension from volatile shares to more certain investments so value of the fund does not fall significantly in the run-up to retirement.
How lifestyling works
But the strategy means share growth is traded for lower returns from the less risky investments.
Lifestyling works when a saver wants to put as much money as they can into an annuity as a one-off purchase, but under pension freedoms, savers leave money in their fund after their retirement age.
This money then fails to replenish the cash taken from the pension fast enough, possibly reducing the time the fund will last.
Financial firm Aegon estimates that a third of a £406,000 pension fund could come from growth in the final decade of saving. Further research from consumer watchdog Which? found the fund could be worth 18% less if lifestyling was applied.
Pension regulators calculate around £100 billion is in workplace pensions and 85% is subject to lifestyling contracts.
Finding out if your pension is lifestyled
“If that’s the case providers need to make changes to ensure their customers money generates a large as fund as possible,” said a Which? spokesman.
However, pension providers cannot change the contracts to move the funds out of lifestyling without permission from the retirement saver.
“The firms are writing to savers explaining the position and asking the customer what they want to do, but it’s a slow job and not everyone understands the implications of their decisions,” said the spokesman.
If you are concerned your pension is caught by lifestyling, contact your provider to discuss the terms of the scheme.
You might want to speak to an IFA about your pension options, including flexible freedoms.
