A common pension investment strategy known as "lifestyling" could leave middle earners significantly worse off in retirement, with those on £30,000 potentially losing as much as £163,000, according to calculations by financial planner Murphy Wealth.
Most workers saving into workplace pension schemes are placed in default funds that often use this strategy, which automatically shifts savings from higher-risk growth assets like shares into lower-risk ones such as cash or bonds as the target retirement age approaches. The aim is to protect the pension pot from sudden stock market drops, but it can also mean missing out on higher returns over the long term.
How Lifestyling Impacts Retirement Pots
For example, a middle earner making minimum pension contributions through auto-enrolment – equivalent to £132.80 per month – could build up a pot worth around £395,500 over 40 years, assuming a growth rate of six per cent. However, if the provider automatically switched to bonds and cash in the 10 years before retirement, and investment growth fell to 2 per cent, then the pot would fall to around £232,500. That is a difference of £163,000.
For higher earners, the impact could be even more severe, with potential losses exceeding £400,000. The strategy was originally designed for a time when people used their pension savings to buy an annuity at retirement, but financial experts argue that times have changed.
Experts Question the Strategy's Relevance
Andy Murphy, of Murphy Wealth, said: "Lifestyle pensions were set up when people wanted to have a pot of cash available to buy an annuity. But times have changed – retirement is now a 20–30-year period when a pension needs to keep growing to maintain its longevity, perhaps taking a degree of risk off the table to reduce volatility. Annuities are only the go-to option in very specific circumstances."
Rob Morgan, of wealth manager Charles Stanley, echoed this view, stating: "Lifestyling approaches can come with significant opportunity cost for those not taking the traditional annuity route. Moving heavily into bonds and cash at 55 or 60 can result in a strategy that is too conservative for longer-term needs, and that may struggle to keep up with inflation."
Hidden Risks in Low-Risk Assets
Mr Morgan also highlighted that even supposedly low-risk assets like gilts are not without danger. He said: "The sharp rise in gilt yields in 2022 highlighted that gilts are not the safe asset they are often assumed to be. When inflation and interest rate expectations rise, or confidence in government finances deteriorates, gilt prices can fall sharply. Investors who had been heavily switched into gilts suffered significant losses despite being in investments generally earmarked as low risk."
These findings suggest that pension savers may need to review their investment strategies, particularly as retirement approaches, to ensure their pots are positioned to meet their long-term income needs.
