Why “pension lifestyling” might not be right for you, and how we can help

As retirement approaches, you may start to think carefully about how you invest your pension savings.

One strategy you may encounter is called “pension lifestyling”, which gradually shifts your wealth into lower-risk investments as you near retirement.

Reducing the amount of risk you’re exposed to might seem like a sensible choice, as you may think it will protect your savings from a sudden market downturn.

However, while the approach might work for some, it isn’t automatically the best choice for everyone. Relying on this default strategy could mean you miss out on opportunities for further growth.

Pension lifestyling usually involves moving your pot to lower-risk investments as you age

Pension lifestyling is designed to manage your investment risk in the years leading up to retirement.

When you’re still some time away from finishing work, your pension is typically invested in higher-risk assets such as equities.

This strategy aims to achieve long-term growth by taking advantage of the stock market’s historical potential to deliver competitive returns over time.

Then, as you get closer to your selected retirement age, your pension would gradually move into lower-risk assets, such as bonds or cash funds.

By the time you do retire, most of your pot would be in these safer assets, protecting its value from sudden market volatility.

The strategy was especially popular in the days when most people would purchase an annuity.

This involved exchanging a portion of your pension for a guaranteed income for a fixed period, or for life, depending on the type of annuity.

The value of your fund would need to be secure on a specific date, so gradually moving money into lower-risk investments reduced the risk of your pot dropping in value just before you purchased an annuity.

Even today, lifestyling still has its potential benefits. Indeed, if you plan to purchase an annuity, the approach could reduce your exposure to a sudden market downturn.

If you prefer a more straightforward approach without constantly monitoring the performance of your investments, this “glide path” into retirement can feel reassuring.

You now have more control over how you take your pension, so lifestyling might not suit you

Retirement planning changed after the government introduced Pension Freedoms in 2015.

You now have much more choice over how you access your pension, and instead of purchasing an annuity, you could leave your pot invested while drawing an income gradually.

This means that pension lifestyling might not automatically suit your unique needs.

For instance, the strategy assumes that you’ll retire at the age you first determined when you joined a pension scheme.

Yet, as your goals evolve, you may find you don’t retire exactly when you initially planned.

Retiring earlier could mean some of your pension remains in higher-risk assets at the time when you need to draw from it. Meanwhile, delaying retirement might keep your money in low-risk investments that may not deliver competitive growth for longer than necessary.

If your retirement lasts 20, 30, or even 40 years, keeping a larger portion of your pension in lower-risk investments could mean your pot fails to keep pace with inflation.

Then, if you intend to rely on flexible withdrawals, keeping too much in low-growth assets could mean you prematurely deplete your fund.

Of course, higher-risk investments are never guaranteed to deliver greater returns. Still, moving to bonds or cash too early could inadvertently limit your pension’s long-term growth and your ability to maintain your dream lifestyle in retirement.

Professional guidance could help you make an informed decision

Rather than automatically assuming pension lifestyling would work for you, it’s essential to assess your retirement goals, tolerance for risk, and how you intend to access your pension.

If you want a guaranteed income from an annuity, lifestyling might still be appropriate. Or, if you plan to use drawdown and wish to retain some flexibility over when you retire, keeping your fund invested in higher-risk assets might be more suitable.

A financial planner can help you here. We could use sophisticated cashflow modelling software to show how different investment strategies could affect your income over time.

Cashflow models can also account for market fluctuations, inflation, and changes in your circumstances.

This could help ensure that the strategy you choose aligns with your aspirations.

Instead of simply accepting the glide path to retirement, professional guidance could allow you to make more informed decisions and ensure you can achieve the lifestyle you’ve always dreamed of when you stop working.

To find out more about how we can help you assess your options, email

info@athertonyork.co.uk or call us on 0208 882 2979.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.