What is lifestyling I hear you say? Is it a way of living life in a certain way or style? Do I like the hippy flowery look to my clothes or home, or am I a minimalist person who likes clean lines and simple taste?
Well, none of these actually – it relates to an investment process which is normally in association with a personal pension. In the old days (I am quite old so I am allowed to say this), people would have a pension and when they got to retirement age at maybe 60 or 65, they would retire and take an income from their pension pot which was normally in the form of an annuity or guaranteed income.
Now as you approach this day of financial freedom or retirement, you would not want anything to go badly wrong in the markets especially if you were going to buy an annuity. This is because this pot which you have built up over many years was there to buy your annuity to provide an income for the whole of your life. So many advisers often recommend that as a client approaches retirement, they should lower the risk of their portfolio to protect the capital amount that they have achieved.
The problem with this is that many clients do not have an adviser to check this. This created a problem especially as the number of advisers has generally declined over the last 20-30 years. So, to combat this some of the insurers and pension companies introduced Lifestyling which was a system built into your pension to automatically sell down your higher risk assets, such as equities and buy lower risk investments such as Fixed Interest. This lowers the risk of your portfolio as you approach retirement.
Great I hear you say – problem solved nothing to worry about! Well, it depends. Sometimes Lifestyling can work to a client’s advantage if the timing is right, however this will be down to luck because it is an automated process and arranged by a computer which will not take into consideration what is happening in the markets. So, for instance if you were approaching your retirement and it just so happened that that the software was going to sell down 10% of your equity holding in March 2020 i.e. at the bottom of the market during the recent pandemic or the 8th March 2022 when European markets were at their lowest because of the Ukraine/Russian war, this might not be the right decision to sell when equities are at a low value.
Plus, if you did not take your pension at the time, then it could be the case that you were invested in low risk investments for a considerable period – e.g. your retirement age is 60 and you did not actually retire until age 70. We recently had a new client who was affected by this and could not work out why her pension had stopped growing because the pension company automatically had de-risked her portfolio to 100% cash for 10 years.
So, what is the answer – well it is never clear cut and will depend on many aspects of your situation and includes the following points:
- Have you hit your target pension pot to provide the level of income you need in retirement?
- What level of risk should you be taking with your pension portfolio?
- Does this level of risk match your Capacity for Loss i.e.is this level of risk appropriate for your financial circumstances?
- Is an annuity the right option for you or should you be considering Drawdown instead?
These are all questions that an IFA will help you answer so that you can take control of your pension and make it work for your situation. If you would like to speak to an adviser here, please call 01753 290111 or visit www.gileswarren.co.uk.
Whilst a lifestyling fund can be the right choice for some people it does not suit everyone, and we would always recommend getting advice if you are not sure which option is the most appropriate for your situation.
Obviously, the value of units can go up and down and past performance is not a guide to the future performance. This document does not constitute advice and a pension may also have other valuable benefits which are not mentioned in this article. This document is dated May 2022 and if you are reading this 3 months or more after this date, then there is a chance that this information is no longer up to date.