Stockmarket falls have highlighted the merits of lifestyling – the strategy of transferring pension investments gradually from equities to bonds and cash in the run-up to retirement.
Scottish Widows pension strategy manager Ian Naismith says lifestyling has grown in popularity over the last 10 years. “With-profits became less popular and people were looking for more security toward the end of their career. Lifestyling became attractive as it mitigates against the risk of the value of a pension dropping by 25 to 30 per cent in a stockmarket crash,” he says.
The strategy is offered across an array of defined-contribution pension options and is a compulsory option for stakeholder schemes.
Group pensions may have lifestyling as a default option while for individual pensions it may need to be requested. The period over which investments are transferred varies but is typically between three and 10 years before anticipated retirement.
Aegon managing director for group pensions Andy Marchant says: “By opting for lifestyling, you are trying to protect your annuity purchasing power or the value of the fund. You are not taking as much risk as you might otherwise.”
Lifestyling is not suitable for all pension investors, however, and Naismith says sophisticated investors who make year-on-year decisions about their investments or who use a financial adviser to determine how to manage risk will probably not need to consider the strategy.
He says: “The adviser can add more value than lifestyling by formula. My view is that lifestyling over a relatively short period, such as three years rather than five, would be optimum. Historically, people would have done better with three years rather than five years.”
Shropshire Independent Financial Services principal Rosemary Heaversedge says: “The main benefit of lifestyling is in crystallising profits but timing is enormously difficult. If you put your investment into bonds or cash five years ago, you would have lost a lot given the good rate of stockmarket growth.”
With the average age of retirement rising and legislative changes assisting employment after 65, people are increasingly unlikely to retire when previously expected.
Standard Life head of pensions policy John Lawson says the inability to predict with any degree of certainty when retirement will come means that lifestyling can be very inflexible. He says: “You may have agreed to retire at 61 or 62 and so the lifestyling may have kicked in from the age of 51 or 52 but when you reach your expected retirement date you may decide to delay until you are 68 or 69 instead. You have effectively lost out on nearly two decades of higher growth earnings.”
Annuity Direct director Stuart Bayliss says lifestyling is a crude instrument which is becoming increasingly outdated. He says: “In the good old days when people retired around the same time and age, automatic lifestyling made a lot of sense but now fewer people are treating retirement as a fixed occurrence. They are choosing to retire when they want or retire only partially and maintain some source of income.”
Clerical Medical head of pensions development Mike Brown says increased interest in income drawdown means that more people will become aware that their retirement income will depend on market returns. He says: “People may want to take a degree of investment risk beyond their retirement date in exchange for potentially higher income.”
Lawson believes that new flexible products which use hedging techniques will take the place of lifestyling. He says: “It used to be the only thing around to protect against stockmarket falls for a long time but within the next couple of years we will see a lot of interesting alternative options coming on to the market.”
For those who prefer to leave their pension fund on autopilot, lifestyling remains a shrewd option. Hargreaves Lansdown head of financial practitioners Danny Cox says: “Lifestyling is perfect for people who do not monitor their pension funds or for those who want to buy an annuity but have a fund worth less than £100,000.”
Marchant suggests that those on a lifestyle option should revisit their plan to adjust it for changes in personal circumstances. He says: “Independent advice is vital for investments and lifestyling as an investment subset is no different.”
Investment returns may be diminished with bonds and cash but Naismith says cautious pension investors are protecting themselves against a nightmare scenario. He says: “It is a trade off. In most instances, lifestyling would not secure a very good income but without it you run the risk of losing a lot of money.”
But Bayliss is unconvinced. He says: “Lifestyling is in vogue and going through something of a revival but it is a mechanism of the past.”