Pension Lifestyling
Discussion
Quite a good article around pension lifestyling which a lot of people may not be aware is something they've been defaulted into.
https://x.com/MerrynSW/status/1751157522151444517?...
https://x.com/MerrynSW/status/1751157522151444517?...
I think that lifestyling is pretty bad, but I’m not sure I could come up with a better one size fits all solution.
That’s the fundamental problem. Personal finance, especially in the world of defined contribution pensions, is personal and requires a high level of engagement (eg. As you approach retirement, to build a cashflow ladder). Currently, the UK public is generally not financially sophisticated enough to do that intelligently.
So you get power users of the system (eg. Those who post on finance sections of forums) for whom it works well. “Normal” people, not so much.
In the past, you didn’t need to be financially sophisticated as you had a DB scheme.
As I say though, I’ve no better ideas. All the more reason to be heavily engaged with your money. Whenever I move jobs, I always shift out of the default lifestyled fund.
That’s the fundamental problem. Personal finance, especially in the world of defined contribution pensions, is personal and requires a high level of engagement (eg. As you approach retirement, to build a cashflow ladder). Currently, the UK public is generally not financially sophisticated enough to do that intelligently.
So you get power users of the system (eg. Those who post on finance sections of forums) for whom it works well. “Normal” people, not so much.
In the past, you didn’t need to be financially sophisticated as you had a DB scheme.
As I say though, I’ve no better ideas. All the more reason to be heavily engaged with your money. Whenever I move jobs, I always shift out of the default lifestyled fund.
Interesting - my provider certainly uses this model (although you can override it), in that as you get closer to retirement age they look to move you from higher risk to lower risk investments. I think it starts from around 10 years off retirement, although I may be wrong.
On the face of it, this seems sensible - you’ve got less time to recover any losses, so try to crystallise the compounded gains of the last 30+ years and de-risk things.
What’s the alternative to this approach that gives some safety? I’ve not read the article (no subscription) but the extract suggests bonds have done unusually badly in recent times. Should the provider have known this, and picked something different? Genuine question - what should have happened? Is the idea that you move to something safer a bad one in itself, or is the problem that what was picked as “safe” wasn’t?
On the face of it, this seems sensible - you’ve got less time to recover any losses, so try to crystallise the compounded gains of the last 30+ years and de-risk things.
What’s the alternative to this approach that gives some safety? I’ve not read the article (no subscription) but the extract suggests bonds have done unusually badly in recent times. Should the provider have known this, and picked something different? Genuine question - what should have happened? Is the idea that you move to something safer a bad one in itself, or is the problem that what was picked as “safe” wasn’t?
But in post pensions freedoms world, you don’t crystallise everything at once. Let’s say you retire at 67 - you might have 30 years in drawdown! So you need your portfolio to keep generating returns, assuming you don’t buy an annuity.
As for alternatives, here’s one option. you’d hold 3 funds.
1. Cash fund. Maybe 2 years of expenses.
2. Less volatile fund. In practise might be developed market bonds. Another 2 years of expenses.
3. The rest in equities
That way, if equities tank, who cares, you’ve got 4 years for them to recover.
If bonds tank like the past year, you’ve got two years to worry about it. In practise in 2024, equities have recovered since the fall in 2022 by now, so you’d might replenish your cash pot out of equities. Obviously that’s a mega quick description and there’s lots that has been written on drawdown strategy.
Lifestyled funds don’t give you any of that choice, and by placing you into asset classes that historically get beaten by equities, despite the fact you’ll be retired for 10+ years, they reduce your returns and therefore the amount you can spend on retirement.
But this requires engagement with your finances.
Edit: I also do think there’s a “what was thought to be safe, wasn’t safe” problem. Bond funds that aren’t very short duration are obviously exposed to interest rate risk. Given that rates were at crazy low levels, they could only go one way. Frankly I think that bond funds, as opposed to individual bonds, aren’t so appropriate for individual investors once you get past short term bonds. Bond funds are a complex product.
(I’m just an amateur, so what do I know)
As for alternatives, here’s one option. you’d hold 3 funds.
1. Cash fund. Maybe 2 years of expenses.
2. Less volatile fund. In practise might be developed market bonds. Another 2 years of expenses.
3. The rest in equities
That way, if equities tank, who cares, you’ve got 4 years for them to recover.
If bonds tank like the past year, you’ve got two years to worry about it. In practise in 2024, equities have recovered since the fall in 2022 by now, so you’d might replenish your cash pot out of equities. Obviously that’s a mega quick description and there’s lots that has been written on drawdown strategy.
Lifestyled funds don’t give you any of that choice, and by placing you into asset classes that historically get beaten by equities, despite the fact you’ll be retired for 10+ years, they reduce your returns and therefore the amount you can spend on retirement.
But this requires engagement with your finances.
Edit: I also do think there’s a “what was thought to be safe, wasn’t safe” problem. Bond funds that aren’t very short duration are obviously exposed to interest rate risk. Given that rates were at crazy low levels, they could only go one way. Frankly I think that bond funds, as opposed to individual bonds, aren’t so appropriate for individual investors once you get past short term bonds. Bond funds are a complex product.
(I’m just an amateur, so what do I know)
Edited by Jawls on Saturday 27th January 09:30
Edited by Jawls on Saturday 27th January 09:33
I’m 20 years out, so not about to be lifestyled out of the higher return stuff just yet. But it’s as you’ve said - there’s a transition over a period (I think 10 years) built in, moving from more to less volatile options (in theory!).
I have no idea whether that’s a good thing or not, hence the questions. I can see that, assuming things don’t go horribly wrong, leaving more in the higher return / higher risk area for longer is obviously better. But, that does assume things don’t go wrong, and timing is key.
I’d think that for every person who would have been better leaving the riskier stuff to run due to being at one point in the economic cycle, there’s another who would have lost a load just when they were least able to recover from it due to being at another point on the boom / bust merry go round…
It’s a matter of luck and judgement I suppose!
I have no idea whether that’s a good thing or not, hence the questions. I can see that, assuming things don’t go horribly wrong, leaving more in the higher return / higher risk area for longer is obviously better. But, that does assume things don’t go wrong, and timing is key.
I’d think that for every person who would have been better leaving the riskier stuff to run due to being at one point in the economic cycle, there’s another who would have lost a load just when they were least able to recover from it due to being at another point on the boom / bust merry go round…
It’s a matter of luck and judgement I suppose!
The better schemes have different lifestyle strategies depending on the end goal, either annuity or drawdown. This results in very different end investments. Annuity target tends to end up in around 75% fixed interest holdings and 25% cash/money market. Drawdown target tends to keep around 50-60% in equities and may also push 25% into cash based funds in anticipation of drawing the tax free lump sum.
Historically, lifestyling has been aimed at annuity purchase. The large falls in bond prices have corresponded with a large increase in annuity rates so it sort of works if you are buying an annuity.
As with anything that's set at the lowest common denominator it won't work for everyone but usually protects the dumbest from the worst.
Historically, lifestyling has been aimed at annuity purchase. The large falls in bond prices have corresponded with a large increase in annuity rates so it sort of works if you are buying an annuity.
As with anything that's set at the lowest common denominator it won't work for everyone but usually protects the dumbest from the worst.
I'll admit I'm obsessed with my pension and check it at least weekly recording fund rates, my holding etc.
Quite happy not to have any lifestyling management and make my own choices. With my provider that's around half the management cost too.
Amazing really as even if you are in one of the 'managed' funds, they don't do anything different until you're ten years off TRA anyway.
Quite happy not to have any lifestyling management and make my own choices. With my provider that's around half the management cost too.
Amazing really as even if you are in one of the 'managed' funds, they don't do anything different until you're ten years off TRA anyway.
Gassing Station | Finance | Top of Page | What's New | My Stuff