Should I ‘lifestyle’ my pension to derisk it before retirement?

Many people seem to have lost large sums of money from their pensions lately as their retirement savings were reduced or ‘lifestyled’, and they were hit by the bond market crash.

This worries me. How does lifestyling work, at what point will it start, and should I choose to stay in the stock market and not in bonds as I plan to keep my pension invested through income withdrawal rather than buying an annuity in retirement ?

I’m in the default fund of a large workplace retirement plan, so will lifestyling happen automatically, and what’s the best way to anticipate this?

Will a simple request to the scheme work well in advance, or should I get out of the default fund because once I’ve made active investment choices, they presumably can’t be overridden at any point?

Tanya Jefferies, of This is Money, replies: When the retirement liberties were introduced in 2015, most people started to keep their retirement money invested instead of buying an annuity.

We warned at the time that savers who plan to do this in the future want to avoid having their fund amortized in the last 10 years or so before retirement, or what’s known as “lifestyle,” into safer, lower-risk bonds.

This was the norm prior to buying an annuity. But if you expected to remain invested for the next 30 years, with the goal of achieving decent growth during that time, it was probably better to stay mostly or entirely in the stock market once you reach retirement age.

The recent bond crash, plus volatile stock markets, unfortunately left many people in default pension funds living with huge losses.

Our retirement columnist Steve Webb replied last week to a 66-year-old reader who has seen his last eight years of investment growth wiped out.

For anyone who currently has a large gap in their pension fund, we explain the most important options here when you are approaching retirement.

Interest rate hikes have hit bond investments, but also meant annuity rates have improved, so we’re looking at whether it’s worth giving them another shot here, and strategies that combine buying an annuity with staying invested in retirement. here.

Below, investment expert Laith Khalaf of AJ Bell and workplace savings specialist Dan Smith of major pension provider Fidelity International explain the investment changes typically made to your pension fund in the run-up to retirement, and what to watch out for before you retire. go with them.

Laith Khalaf, Head of Investment Analysis at AJ Bell, replies: Life styling used to be a very common way for pension default strategies to reduce the risk for savers as they approach their retirement date.

The pension pot would gradually move from stocks to bond funds, which move in the opposite direction of annuity rates.

The idea is that if annuity rates fall, your bond fund will rise, so if you’re going to buy an annuity, you should be able to secure a similar amount of income.

And if your fund falls in value, the annuity rates rise, compensating for the decline, again in terms of the retirement income you receive.

This strategy worked quite well when 90 percent of retirement savers bought an annuity, as they did until 2015, when retirement liberties were introduced.

Now only about 10 percent of people buy an annuity with their retirement pot, and many choose to continue investing, like yourself, or simply withdraw their money as cash.

But many older retirement plans still automatically continue lifestyling programs that convert them into bonds, expecting them to buy an annuity.

This lifestyle program usually starts five to ten years before your chosen retirement date and is automatic, unless you indicate otherwise.

Lifestyling is likely to be common in older employee retirement plans, as well as some older individual pensions.

More modern standard workplace retirement strategies have generally moved away from lifestyle, although they will have some form of risk reduction strategy, which may or may not be right for you, depending on what you plan to do with your retirement in retirement.

So it’s a good idea to review your investment strategy when you retire, regardless of the type of pension you have.

It is best to ask your pension provider about his derisking strategy. If it’s a bond fund lifestyle and you’re planning to buy an annuity, you’d do well to go ahead with it.

But in your case, since you keep your money invested and get an income out of it when you retire, it’s probably not a good idea.

If you leave the standard scheme of your pension scheme, you have to make your own investment decisions, but you also have to do that if you invest your pension as a retirement.

If you are not comfortable with this, consider seeking the help of a qualified financial advisor.

Changing your investments should be relatively easy and all you need to do is instruct your pension provider.

If the investment scope is too narrow, or if the investment change process requires too much paperwork, consider moving to a more modern pension such as a Sipp (Self-Invested Personal Pension), where you can invest in funds, stocks and investment funds. trusts, and can post instructions online or via a mobile app.

By bringing all your pensions together in this way, you keep them organized.

However, be careful if you move the money from your current workplace pension so that it doesn’t affect the premiums your employer still pays.

And if you’re transferring older pensions, make sure there are no valuable guarantees attached to them before you transfer them.

Dan Smith, head of workplace distribution at Fidelity International, answers: Market volatility can often feel daunting. And in uncertain times, some people may want to make hasty decisions about retirement based on short-term circumstances.

Some may think of selling or moving investments in hopes of minimizing loss, but doing so can have significant long-term consequences for your financial well-being and retirement as you may miss out on market recovery.

This is why it is often safer and more practical for many to stay within their standard investment strategy.

It’s also important to remember that market volatility is an unavoidable and inherent part of long-term investing, and the earlier you are in your working life, the longer you can not only recoup any losses, but also benefit from recovery.

What is a standard pension fund?

A default plan (also called a default strategy) is the investment option that pension plans use for participants who do not want to actively choose where they invest.

It is also used by members who have looked at all their options and decided they want to leave things to the experts.

Standard plans usually put your money into investments that are exposed to risk but have the potential to grow your savings long before retirement, such as stocks and stocks, and then move some of your money into less risky investments. move when you retire.

Default settings are designed to suit as many people as possible.

While experts manage the investments, it’s still a good idea to keep an eye on the money you have in a standard plan so you can be sure you’re happy with the way it’s taken care of, and other decisions things you may want to take – such as whether or not to increase your premium and your planned retirement date.

What is a ‘lifestyle’ strategy?

Lifestyle strategies are becoming more dynamic, but simply put, they invest your retirement in a fund that is carefully managed to a target date.

Each fund will aim for higher growth when it is well away from its target date by investing in higher risk investments. Subsequently, a certain number of years before its target, the fund will begin to reduce the level of risk it incurs by gradually shifting some of its assets into lower-risk investments.

Should You Follow a Lifestyle Strategy?

While there are plenty of benefits to standard lifestyle plans, some people may want to manage their pensions themselves.

If this is the case, they have the option to forgo their default strategy and instead “self-select” their funds with the desired risk appetite.

If you are on your way to retirement, you should receive a letter in advance letting you know that you are moving to a lower risk strategy. At that point, you may want to contact your pension provider and let them know if you want to. change your retirement age (or target date) to later, or opt out and manage the plan yourself.

‘It is important to bear in mind that the value of the investments in your pension and any income from them can go up as well as down.

While it can be nerve-wracking, it’s important to remember that pensions are a long-term investment and volatility is a normal part of long-term investing.

So think carefully and consider talking to an authorized financial advisor before making any decisions. And don’t forget that withdrawals from a pension product are normally only possible when you are 55 years old (57 as of April 2028).