Pensioners Warned: Little-Known Change Could Cost £12,000
A little-known change to pension schemes could significantly reduce retirement wealth, potentially costing savers thousands of pounds. This automatic process, known as 'pension lifestyling,' shifts retirement pots from investments and stocks into lower-risk assets like bonds and cash as savers approach retirement age. However, many Britons are unaware of this default strategy and its potential impact on their savings.
What Is Pension Lifestyling?
Lifestyling is an investment strategy that automatically moves pension funds out of higher-growth investments, such as equities, into safer options like bonds and cash. This typically occurs when savers reach a certain age, often a few years before retirement. The goal is to protect the pension pot from stock market volatility, providing more certainty about the final amount available at retirement. However, this cautious approach can also limit growth potential.
Potential Cost of Lifestyling
According to reports, shifting a £100,000 pension pot from a fund growing at 5% to one growing at 3% over five years could result in approximately £12,000 in lost growth. This reduction can be particularly damaging when bond markets are uncertain, as older workers might see their pension fund make a loss just before retirement, potentially forcing them to delay retirement.
Who Is Affected?
Lifestyling primarily affects individuals with 'defined contribution' pensions, where savers build a pot invested for retirement. It does not apply to 'defined benefit' or final salary schemes, where employers guarantee a lifetime income. Savers may be automatically enrolled in lifestyling unless they opt out, making it crucial to check their scheme's rules.
How to Check and Respond
To find out if your pension is subject to lifestyling, contact your pension scheme provider or review any communications about your plan. The process may start at different ages and progress differently depending on the scheme. Savers who prefer to maintain higher growth potential may choose to opt out or adjust their investment strategy, but this carries higher risk. Staying informed and proactive can help avoid unexpected losses.
Final Advice
Pension experts recommend that savers regularly review their pension statements and understand the default strategies applied to their pots. While lifestyling offers protection against market drops, it may not suit everyone, especially those with other retirement income sources or a higher risk tolerance. Consulting a financial adviser can help determine the best approach for individual circumstances.
