Lifestyling – This is a word that has become commonplace in the pensions industry over the past few years, although it may cause some questions to be raised when it is first heard in this context.
The topic has been thrown back into the limelight recently with the turmoil and falls in the world’s stock markets, caused by the COVID 19 pandemic.
Whilst many of Chancellor’s clients use what is known as Flexi Access Drawdown (FAD) for their retirement income, purchasing a lifetime annuity still meets the requirements of many people. Flexi Access Drawdown essentially requires the pension fund to remain invested during someone’s retirement, but it isn’t suitable for everyone as there are ongoing risks, costs and reviews that need to take place – but there are some big advantages too, including flexibility. For example, the amount that can be withdrawn from FAD can be amended (upwards and downwards) and the potential to pass on the remaining pension fund assets to family members tax efficiently on death.
Conversely, an annuity has no flexibility, but one potential advantage compared to FAD are the inherent guarantees on the income paid.
In recent weeks many of the world’s stock markets have fallen back due to concerns about the virus, so anyone who was retiring say in the last week of March but had remained “fully invested” may have found that the amount of pension fund that they had available to purchase the annuity may have fallen sharply.
So, to counter this issue, some years ago the pension providers and insurance companies devised a system called “lifestyling” to reduce or negate the impact of sudden drops in the value of investments prior to, or at, the intended retirement date. Each provider uses a different method but hopefully we can give readers an indication here of how Lifestyling can potentially benefit some pension savers.
Whilst past performance may not be a reliable guide to the future, it is generally acknowledged that over the longer terms, stock market based investments such as shares and equities have produced the best returns when compared to fixed interest bonds, property and cash deposits; albeit with more short term risks. So, a basic principal of Lifestyling is that where a saver initially has many years until their intended retirement date, the majority of the pension fund is invested into share or equity based investments. Some pension companies start the gradual reduction of the share based element over 5 or 10 years before the person’s chosen retirement date and typically the scheme will move share based assets into investments with lower risks such as fixed interest and/or cash. Whilst the system isn’t totally fool proof and without its caveats, anyone who was due to purchase an annuity at the end of March 2020 or in the following weeks should have found that any drop in their pension fund should have been a lot less than if they have been invested in shares.
All Group Pension plans including “Auto-Enrolment” Qualifying Workplace pension schemes that the majority of UK employers are compelled to put in place for their employees have a range of “lifestyling” options geared towards different retirement outcomes as their default funds – these are what savers will be invested into unless they make their own decision to opt for a different investment strategy.
In summary, Lifestyling could have been very useful for anyone, say, retiring in the last couple of months but it generally works best for those who have initially chosen a specific retirement date some years before and have stuck to this date, because if they retired earlier, then the full risk reduction process may not have been completed.
If you have any questions whatsoever about your pension fund or retirement investment strategy then please don’t hesitate to contact one of our Chartered Financial Planners.
CAPITAL AT RISK — The material in this article is for information purposes only. Please ensure that you clearly understand the nature of any investments described and the potential risks relevant to them. Past performance is not a reliable indicator of future performance and the value of an investment and the income received from it can go down as well as up.