If I were to ask you about your preferred retirement lifestyle option, you might think about going on holiday, playing golf or looking after the grandchildren. Yet in the context of how our pension funds are invested, “lifestyling” could blight your retirement prospects.
This is what 59-year-old Martin unfortunately found out the hard way. I haven’t used his full name to protect his privacy, but he wanted his story to be told to raise awareness of the problem.
Forced into early retirement after developing a disability, Martin considered what to do with his biggest pension pot. Built up with a former employer, a statement from June 2021 said it was worth nearly £200,000. So he got quite a shock last October when he found its value had plunged to £134,000, wiping nearly one-third off of his pot. How could this have happened?
The answer, as I’m sure most of you have guessed, is lifestyling. As we move towards a more sedate pace of life in retirement, so too do our investments. Unless we say otherwise, money invested in most defined contribution pensions is gradually moved out of equities as we grow older and into bonds and cash, which have traditionally been lower risk investments. However, the dire performance of UK government bonds (gilts) in recent years means they have been anything but.
Adam Walkom, a financial planner at Permanent Wealth Partners, which Martin turned to for help, says Martin’s pension was steadily being lifestyled into a gilt fund that fell nearly 50 per cent in the above period, during which the Bank of England raised interest rates more than a dozen times.
Martin and his wife were shocked that his pension provider, a company charging a fee to look after his money, could have let this happen. “We just trusted them,” he says.
It’s a salutary tale for Martin and his family, who will struggle to recoup their losses, but who is at fault here? And as millions of older, unadvised savers inch closer towards retirement age, how can they be protected from a similar fate?
For decades, regulators have favoured lifestyling as the default option. Unless you opt out of this strategy, most pension providers will start to de-risk savers’ investment portfolios six to 10 years before their intended retirement date (typically the state pension age, though it could be lower).
Walkom describes lifestyling as “a weapon of wealth destruction”. Although Martin’s is the worst case he has seen, he says many more savers in their 50s and 60s will be worse off “for an action someone else has taken without their specific approval”.
In the past, you could argue this “one size fits most” strategy was more suitable because, first, the bond market behaved largely as expected and, second, most people traded in their pension pot for an annuity when they retired, buying an income for life. Yet today, neither is true.
Pension freedom reforms launched in 2015 have given individuals far more choice. Rather than buy an annuity when you retire, it’s more common to stay invested and try to live off the investment gains your pot is able to generate, using drawdown to take income flexibly. The fact that defined contribution pensions fall outside inheritance tax calculations adds to the advantages.
But if you’re going to stay invested throughout your 60s and 70s, you don’t want to be invested in bonds and cash. So why does lifestyling remain the default option? Plus, in the name of the Consumer Duty, why aren’t regulators and pension providers doing more to question the poor consumer outcomes for savers like Martin?
I’m sure providers will point to letters and annual pension statements informing members that they’re in the lifestyle option, but how many truly understand what this means, or what these funds actually contain?
Yes, Martin could have moved his money. But if consumers stayed with an investment strategy they incorrectly believed was low risk, will the small print be enough to shield providers from further scrutiny?
Lifestyling strategies also vary between providers — not all went as heavily into gilts funds as others. We hear a lot of regulatory noise about protecting consumers from the dangers of risky investments, so why should this be overlooked?
The pension world’s reliance on “default” strategies is increasingly at odds with the panoply of different routes to retirement. One size fits most is no longer good enough, but the problem is what to replace it with?
People find pensions confusing and depressing. Most of us have pots spread all over the place we don’t really know what to do with, plus we are not saving anywhere near enough. Studies show that very few engage with their pensions or make active choices about where their money is invested.
While auto-enrolment has been a success in encouraging more than 10mn workers to start investing (the majority in plain vanilla “default” funds), this “hands-off” mentality cannot persist when we come to access our funds — yet few can afford professional advice.
If current regulatory thinking were to move away from a mass default option to offering consumers a choice of potential pathways, how capable would people be of making the best choice for their circumstances?
The Department for Work and Pensions is keen to encourage even more consumer choice, consulting on “pot for life” proposals that would let us choose a provider to look after our workplace pension contributions in the same way we choose a bank account.
Unsurprisingly, the giants of the pension world poured scorn on such a radical shake-up this week, claiming the average saver’s lack of financial education would lead to “suboptimal” investment decisions and reduce innovation in the market.
But hang on a minute — we can’t blame consumers entirely for this!
In a blistering blog post this week, the veteran pensions expert Henry Tapper argued that the pensions industry is also at fault, as 28mn people saving for retirement in workplace-sponsored schemes “struggle on without dashboards, with vicious headwinds when we try to consolidate our pots, and with the feeblest of guidance”.
Pension Wise, the government’s free, impartial guidance service for the over-50s, provides an important role, though too few people make an appointment to discuss their options. Why not reduce the age limit to the over-40s, giving more people the chance to make a meaningful difference?
As for innovation, some pension providers do much more than others to encourage education and engagement using digital apps, in-person staff events and online webinars where members can ask questions. Sarah Pennells, consumer finance specialist at Royal London, tells me one of the most popular questions people ask is “What’s actually in my pension?”
If you don’t know the answer, go and find your online log-in now. Yes, pensions are complicated, but the quality of your lifestyle in retirement will be determined by the decisions you make — or don’t make — about how and where your money is invested.
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