A little-known change could be secretly affecting your pension pot, potentially leaving you significantly worse off. Many pension schemes automatically shift your retirement savings into a "pension lifestyling" strategy as you approach retirement age.
How Pension Lifestyling Works
This strategy moves your pension money out of stock market investments and into lower-risk assets such as bonds and cash when you reach a certain age. The aim is to protect your pot from sudden slumps in value. However, this cautious approach can come at a cost.
Estimates suggest that shifting a £100,000 pension pot from a fund growing at 5% to one growing at 3% over five years could result in approximately £12,000 in lost growth.
M&G Weighs In on Lifestyling Options
M&G, a leading investment firm, explains: "Different pension plans offer different lifestyling options. The one you choose can help you manage several types of risk as you approach retirement, depending on the option selected."
Benefits of lifestyling may include:
- Reducing the risk of short-term falls in your pension value by gradually moving money into lower-risk investments.
- Aligning your pension savings with how you plan to use them at retirement.
- Protecting your pension savings from inflation, as the cost of everyday items rises over time.
However, M&G warns: "While lifestyling aims to manage risk, your pension can still go down as well as up, and you may get back less than you put in. It's important to think about how you plan to use your pension savings when choosing a lifestyle strategy."
Your savings may be moved into funds that could prove to be a poorer short-term investment option than your current funds. Pension holders are advised to review their options and understand the implications of lifestyling strategies.
