Business Matters – Issue 35

A tectonic shift

The removal of the default retirement age in 2011, the announcement of ‘pension freedoms’ in 2015 and recent increases in the State Pension age have reshaped how we think about our working lives, bringing an end to what used to be a very structured framework for retirement.

Indeed, for many of today’s workforce, there won’t be a ‘cliff-edge’ at which we move directly from work to retirement.

For current retirement savers, there’s not much certainty and very little in the way of guarantees. But what we do have is a much bigger say in how and when we retire, from the beginning of the savings journey right into later life.

But with our retirement date now being more of a moving target, your default pension may not deliver the flexibility you desire. What’s more, amid the recent soaring inflation, it’s more important than ever to ensure your pension plans are on track.

Lifestyling: An outdated concept?

If you pay into a default pension scheme, it’s possible you could be signed up for a lifestyling option. Essentially, lifestyling (or de-risking) aims to help grow your savings during your main working years and then protect your pension as you near retirement age. Money invested is gradually moved out of equities and into bonds and cash. The logic behind shifting the weighting to traditionally lower-risk assets is that it aims to ‘lock in’ the investment growth.

However, this approach was devised at a time when most people bought an annuity and needed to de-risk as they approached that purchase. Nowadays, while lifestyling is designed to protect your pension from a market crash, it can actually hinder the long-term growth potential of your pension.

One size doesn’t fit all

While it may seem attractive to have your pension investments managed for you, lifestyling may not be the most appropriate choice.

Ironically, lifestyling options can be mismatched with the lifestyle (and flexibility) desired by modern retirees. After all, they’re designed to meet the needs of many – and aren’t tailored to your individual goals, needs or attitude to risk.

Some other drawbacks to consider include:

• If your savings have been moved into a lower-risk fund through lifestyling, you could miss out on many years of potential growth – and therefore pot longevity – during later life. After all, your retirement could last decades!
• Shifting your savings into a low-risk fund could also leave you vulnerable to the effects of inflation on the real-term value of your pension savings.
• Investing in lifestyle funds still carries its own set of risks. The automated management of these funds means that assets are sold from equity funds on predetermined dates, irrespective of prevailing market conditions. This could inadvertently result in ‘locking in’ losses.

Remember: an overly cautious investment strategy can be just as harmful as an overly risky one.

Diversifying your portfolio

Although there’s more flexibility in retirement now, it’s important to think about what you’d like your future to look like. You might dream of embarking on some travels, starting a new business in later life or swapping employment for rewarding unpaid work.

Or you may just want to have the opportunity to make your own choices, depending on your circumstances and ambitions at the time.

A diversified portfolio is an important part of this, which is where financial advice comes into its own. An adviser can help you choose more appropriate funds to match your personal objectives and risk appetite, curating the best mix of assets and products to invest in, with more flexible timescales than a lifestyling approach.