Does your pension match your plans?

Pension “lifestyling” is something many savers experience without realising it because it operates quietly in the background of most workplace schemes.

The idea is that as you approach your selected retirement age, your pension gradually shifts from volatile assets such as equities into more stable options like bonds and cash.

The aim was to protect savers from a market decline just before they needed to access their pot to buy an annuity. Many workplace pensions still apply this approach automatically, meaning investment growth begins to stall even if this doesn’t match a person’s retirement goals.

This strategy made sense when annuities were the norm – annuity rates are closely linked to long-term interest rates, so moving into bonds helped stabilise the pot’s value ahead of retirement. But with life expectancy rising and pension freedoms giving people more choice, fewer retirees are buying annuities. Today, many rely on their pension for 25 to 35 years, often drawing income throughout retirement rather than accessing the whole fund up front.

In this context, moving into lower-growth funds too soon can restrict the growth needed to maintain your standard of living. What was once a sensible safeguard can now hold back a pension’s ability to support a long and active lifestyle.

Many people collect a trail of workplace pensions, which default to lifestyling without the member ever reviewing if it suits them. And in 2024, analysis by Investing Insiders found 55 per cent of default workplace pension investments underperformed their benchmark.

That doesn’t mean lifestyling has no place. For people who value simplicity and want reassurance, gradual de-risking can help reduce anxiety and smooth out volatility as retirement approaches. For those planning to take a substantial lump sum or purchase an annuity, the strategy can offer stability in those final years before retirement.

However, there are drawbacks if someone intends for their pension to remain invested for decades in drawdown. Being heavily allocated to bonds and cash from your late fifties onwards could lead to weaker long-term results, as inflation erodes the spending power of a pot that is no longer growing meaningfully.

Whether lifestyling is right for someone ultimately depends on how they plan to use their pension in retirement. It can work well for those wanting a simple, protective glide path into an annuity or lump-sum-based retirement. But it may not suit people seeking long-term growth through drawdown or those whose retirement plans differ from the assumptions built into their schemes.

With retirement now longer and more flexible than ever, understanding how lifestyling works, knowing your options, and reviewing your pensions is essential.

As a fully qualified Financial Planning Consultant with one of the country’s leading financial advice firms, Matthew helps clients fully understand their options to enable them to make the best informed decisions.