Three quarters of pension savers have never heard of 'lifestyling', the derisking strategy that has left many sitting on investment losses at retirement, new research reveals.

In the 10-year run-up to retirement age, people with invested pension funds typically see them shifted out of stock markets and all or part way into bonds, historically regarded as a 'safer' option, and cash.

Some 64 per cent are unaware that this de-risking process, known as lifestyling but also sometimes called target-dating, usually happens to pension funds during the period before retirement unless you take active steps to avoid it.

Meanwhile, just 40 per cent know where their pension is currently invested, according to the survey by RBC Brewin Dolphin.

This means millions of people's plans for retirement hinge on ‘lifestyle’ pensions that may not be suitable for them, says the firm.

The lifestyling strategy was originally created to position people to buy an annuity, but most people now stay invested in drawdown schemes to fund retirement.

Anyone who wants to keep their pension fund invested, perhaps for decades to come in retirement, might want to consider whether it is better to opt out of 'lifestyling' altogether and stick with stocks, which are riskier but have more potential for long-term growth.

A bond market crash last autumn meant some older workers who had been defaulted into lifetyled funds discovered to their horror they were sitting on huge losses right on the brink of retirement, which some were forced to delay as a result.

RBC Brewin Dolphin says many of these funds are labelled as low risk, but rising interest rates during 2022 and 2023, coupled with falling bond prices, meant many fell precipitously in value.

It says many funds are yet to recover, and have little hope of doing so unless interest rates return to the lows of 0.1-0.5 per cent seen from March 2009 to February 2022, which appears unlikely any time soon.

'Lifestyle funds were designed in a time when most people saving for retirement would buy an annuity, when the reality is somewhat different for many savers today,' says Rob Burgeman, senior investment manager at RBC Brewin Dolphin.

'Certainly, when bond and gilt prices were kept high by low base interest rates, these funds "locked" savers into anomalously and historically low annuity rates.

'So, what they have turned out to offer is return-free risk, as anyone retiring in the past two years has probably discovered. That is far from what they believed they were buying.

'A lot has changed since the Covid-19 pandemic and lifestyle funds have turned out to be at higher risk of not achieving their goals for retirement, leaving anyone on the cusp of retirement with a hole blown in their pension pots and little opportunity to rebuild the capital.

'In all truth, they will likely take a very long time to make that money back, if it ever happens.'

To illustrate the issue, RBC compares the performance of two Scottish Widows funds, one that derisks and the other containing a broader spread of investments including stocks.

The Pension Protector Series 2 pension fund ‘de-risks’ ahead of an annuity purchase and is almost entirely made up of bonds and money market funds.

The Pension Portfolio Four Pension Series 4 fund, which includes stocks, has returned to its previous peak in early 2022.

RBC Brewin Dolphin surveyed 2,000 over-18s with a pension, weighted to be nationally representative, and found most people do not know what lifestyle pensions are or how they work.

It says lifestyle pension funds usually start to de-risk by transitioning from equities to bonds and cash about 10 years out from your retirement date.

However, it points out at that at this stage in life many people have no liabilities or financial dependents, and are in a position to increase contributions to give their pension the best chance of growth, which won't happen if your pot is largely made up of bonds and cash.

RBC Brewin Dolphin explains that if your pension remains invested, you can take the natural yield - meaning dividend income - during your lifetime, then pass the pot to your family members when you die.

The firm says that lifestyling is potentially still relevant to people who want to buy an annuity, but that is a lot less common in recent years - despite a recovery in annuity deals due to interest rate rises. 

Is YOUR pension being lifestyled?

Rob Burgeman explains how to find out and what to tell your pension provider about your plans.

1. If you want to check you’re on a lifestyle pension, contact your provider and ask them about the approach taken by the pension fund you are invested in.

2. Consider carefully how you want to use your pension – if you plan on buying an annuity, a lifestyling fund may be the right option for you. If you plan to pass your pension on to your family, it likely won’t be.

3. If you are happy with remaining in a lifestyling fund, make sure your retirement age is what you have planned.

4. Use your plans for retirement to inform any new fund choice, considering your attitude to risk, what your priorities will be, and your other sources of income.

Lifestyling pensions: Countdown to retirement

'Lifestyling gradually shifts a member’s pension savings from investment assets which generate growth, towards assets more closely aligned with their chosen retirement target of drawdown, annuity, cash or a combination,' says Sonia Kataora, partner and head of defined contribution investment at Barnett Waddingham.

She says lifestyling provides automated risk management and convenience, and reduced exposure to unwanted volatility before retirement, but does take a ‘one size fits all’ approach.

'Members should check the amount they contribute towards their pension savings and consider their chosen investments ideally as lifestyling or retirement approaches.

'The most important thing is to communicate with their provider if a) their chosen lifestyle no longer ties in with their retirement target and b) they need to change their selected retirement age, so that their mix of investments better reflect their retirement goals.'

Kataora says savers should be aware of the following in the run-up to retirement:

- Lifestyling is typically the default option in workplace pension schemes, and you should check whether it aligns with your retirement goals and risk tolerance.

- A specific retirement age is used, usually the scheme's default like 65, so if you plan to retire earlier or later inform your provider when prompted to do so, so the 'lifestyle' process can be adjusted accordingly.

- Since pension freedom was introduced in 2015, you can access pension savings via drawdown, an annuity, in cash, or in some combination of them. As people are often unsure what their plans will be in retirement, default lifestyle strategies now typically assume you will choose drawdown or a combination of the above.

Kataora explains the usual timeline pension schemes follow as you approach retirement.

15-plus years from retirement

Pension contributions are invested in growth-oriented assets, such as equities. These assets tend to offer higher returns over the long term, but they also come with more risk.

10 years or fewer from retirement

Investments are gradually moved towards assets better aligned with the chosen target date. The idea is to safeguard the accumulated pension savings from being exposed to the worst returns at the worst possible time.

Annuity target: Reducing the allocation in growth assets, with the primary focus on retaining purchasing power in retirement.

Investment drawdown target: Greater diversification between assets to reduce the impact of any sudden market downturns.

Cash target: Diversification in less volatile assets, with the primary focus on retaining the value of the pension savings in real terms.

At retirement

Your pension fund is typically invested in line with your chosen method of taking savings in retirement.

This ensures that the pot is more stable, and less likely to experience significant short-term losses that will impact you in retirement.

Should you go along with lifestyling - how to decide if it's for you 

Sonia Kataora, partner at Barnett Waddingham, explains what to weigh up.

Lifestyling: Pros and cons

For

- Automatic investment management, removing the need to actively manage your investments.

- Reduction in volatility risk as you near retirement, for example by staying 100 per cent invested in equities and exposed to sudden market impacts.

- Convenience of a hands-off approach, which can be reassuring if you are not confident or interested in managing pension investments.

- Protection against behavioural mistakes and making emotional investment decisions, such as selling during a market downturn, which could crystallise losses.

Against

- Assumes a fixed retirement date, when people may remain unsure about their plans until very late notice, which may result in investments being moved at the wrong time.

- Limited personalisation, not catering to individual circumstances or risk preferences but following a generic pattern that may not be optimal for everyone.

Choosing your own investments: Pros and cons

For

- Greater control, letting you tailor your investment strategy to suit your own risk tolerance, time horizon, and retirement goals.

- Flexibility for different strategies, for example if you plan to continue investing after retirement you can maintain a higher allocation to growth assets.

- You can react to market conditions and opportunities, or changes in personal circumstances.

Against

- Higher risk of mistakes, because self-selecting investments requires financial knowledge and experience. and poor investment choices or panic-selling in a downturn could result in significant losses.

- Time and effort of managing investments which requires regular attention and may not suit people who prefer a hands-off approach.

- Potential for emotional decisions during market volatility, and making rash decisions that could undermine long-term goals.