Lifestyling

Lifestyling provides automatic switching of your pension savings into another fund, or funds, as you get closer to your planned retirement age.

What is the purpose of lifestyling?

It aims to help you reduce the risks you face with your pension savings as you approach your retirement age.

What risks could lifestyling help you manage?

Depending on which lifestyling option you choose it may:

Help to reduce the risks of short-term falls in the value of your pensions savings as you get nearer to retirement compared to your original fund choice. Help to protect the buying power of your pension savings against the effects of inflation.

 

Or, a combination of these factors. Please note whilst lifestyling aims to reduce risk, the value of any investment can still go down as well as up and so you may not get back the amount you put in.

  • Switches happen automatically, so regular pension savings reviews can focus on whether the lifestyling option chosen is still appropriate.
  • Without lifestyling you would need to make changes, as you thought appropriate, to your investment choice as you approached your retirement age.
  • Depending on your lifestyling option, your savings may be moved into an investment type (such as Gilts) that has a closer relationship to how a pension income is calculated. Therefore, if the value of that type of fund goes down, the cost of providing a pension income could also be expected to reduce. If on the other hand, the cost of buying a pension increases, then that fund would also be expected to increase in value as well.
  • When you take your benefits, current tax rules allow you to usually take up to 25% of your pension savings as a tax-free cash sum. To help make the amount of that lump sum more predictable for you, the lifestyling process may move part of your money as you approach retirement into a cash or deposit fund and protect it from falls just before you retire.
  • You can change your mind at a later date. For example if your circumstances change, and lifestyling is no longer appropriate to you, you can move your pension savings out of the lifestyling option and into other funds you choose.

The design of the lifestyle option is based on our long-term expectations of how funds might perform. As it is a fixed strategy, it does not take account of changes in economic or market conditions that might occur in the future. For instance, you may find that funds do not keep pace with inflation or the automatic switches of your pension savings between funds happen at times that may not prove to be the best for you.

As a result:

  • Your savings may be moving into a fund, or funds, that could prove to be a poorer investment option than your current fund or funds.
  • Your savings, depending on your lifestyling option, may be moving into a fund that is closely linked to pension income rates (or annuity rates) at the time when these rates are not at levels that meet your needs.
  • The available lifestyling option may not exactly match your needs. For example, it may be designed to help match to pension income rates - or to help make a possible lump sum at retirement more predictable. You may not be saving towards those aims in the same proportions that the lifestyling option is aiming to deliver.
  • Lifestyling works towards your originally planned retirement age. If you decide to take your benefits before or after that age then lifestyling is not working towards your actual retirement date, as funds may not be switched at the right time.
  • Lifestyling is designed to suit the needs of most people saving for their retirement and so might not be suitable for your particular needs or attitude to the risk you are prepared to take and return you expect.
  • Your personal circumstances may change (for example: marriage, divorce, inheritance) and so your lifestyle option may no longer be right for you.

What are the risks that lifestyling might help with?

The main investment risks most people face saving for their retirement, and that lifestyling could help with, are:

  • Volatility Risk - The chance of short-term fluctuations, both up and down, in the value of your pension savings as events in financial markets cause the value of investments to go down as well as up.

While this can happen at any time, we believe it is likely to be most important when you are close to retirement (when you have less opportunity to make up any losses) or when planning changes to your funds.

  • Inflation Risk - The risk that the value of an investment does not grow quickly enough to keep up with inflation and so the buying power of your money is eroded. 

We believe this risk is likely to be important to you throughout the time you are invested.

  • Conversion Risk - Your pension savings could be used to provide you with an income when you choose to take your pension benefits. The income you receive will depend on both the value of your pension savings and the cost of turning your savings into an income. This creates the risk that the value of your pension savings does not move in line with the cost of providing you with an income. 

We believe this conversion risk is likely to be important to you when you are approaching retirement.

You need to consider the importance of each of these risks to you based on your circumstances.

Can you give me an example?

Investor A - does not use lifestyling

  • The investor takes out a pension plan with 30 years to go to retirement.
  • They decide to invest in Fund A, which they believe has the potential to grow strongly over the long-term, although it is likely to offer more risk compared to other funds.
  • With ten years to go the investor decides to move some of the pension savings held in Fund A into Fund B.
  • Fund B is expected to be less risky and provide a more predictable return than Fund A, but that means it is expected to produce a lower return.
  • In the years running up to retirement the investor sends a number of instructions to the pension provider to gradually move more and more of the pensions savings from Fund A into Fund B.

Investor B - uses lifestyling

  • The investor takes out a pension plan with 30 years to go to retirement.
  • A lifestyle option is available using Fund A, which they believe has the potential to grow strongly over the long-term, although it is likely to offer more risk compared to other funds.
  • As a lifestyle option has been selected their pension savings will gradually start to move from Fund A to Fund B with 10 years to go to retirement. Fund B is expected to be less risky and provide a more predictable return than Fund A, but that means it is expected to produce a lower return. The gradual movement into Fund B will start automatically unless the investor confirms that this should be cancelled.

An example of how this might work:

Years till planned retirement age

Fund A (% of money invested)

Fund B (% of money invested)

10

100

0

9

90

10

8

80

20

7

70

30

6

60

40 

5

50

50

4

40

60

3

30

70

2

20

80

1

10

90

0

0

100

 

Summary

In this simple example the end impact of both approaches could well be roughly the same. However, there are differences in what is required for each investor:

  • Investor A has had more control of when changes happen, which could be an advantage if the timing on changes was managed correctly, however they do need to make the changes themselves.
  • Investor B has no choice on the exact timing of changes - but does not need to remember to make potentially tricky decisions on when the changes should happen.

Lifestyling is an option that appeals to, and is valued by, many investors. However, it does not appeal to everyone and some people prefer to have more control over their investment planning as they approach retirement.

Further Information

We offer a number of different lifestyling options depending on the pension plan you invest in, or are considering investing in. Further information is available in your plan documentation. For example your Your Fund Guide will provide you with more information on specific lifestyling strategies.
 

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