Millions of workers could be heading for a £160,000 retirement shortfall, according to a warning from financial planner Murphy Wealth. The firm suggests a typical middle earner could end up with £163,000 less in their pension pot because of a strategy known as 'lifestyling'.
The approach sees pension savings gradually shifted from shares into bonds and cash during the years before retirement. It was designed to protect savers from a stock market crash shortly before they started drawing their pension. But experts warn it can now leave some people sacrificing years of potential investment growth.
Potential £163,000 difference
Murphy Wealth estimates that a worker aged 22 to 29 earning £30,000 could build a pension pot of around £395,500 over 40 years, assuming 6% annual growth. But if their provider automatically switched them into lower-growth assets during the final ten years, with growth falling to 2%, the pot could shrink to around £232,500. That is a potential difference of £163,000.
The figures are projections based on assumed investment returns and are not guaranteed.
Pension system has changed
Lifestyling became popular when people approaching retirement commonly used their pension pot to buy an annuity – exchanging their savings for a guaranteed income. But the pension freedoms introduced in 2015 gave savers much greater choice. Many now use pension drawdown, leaving their money invested while taking an income when needed.
That means someone retiring at 60 could potentially need their pension to keep growing for another 20 or 30 years.
Adrian Murphy, of Murphy Wealth, said: “Lifestyle pensions were set up when people wanted to have a pot of cash available to buy an annuity.
“But times have changed – retirement is now a 20–30-year period when a pension needs to keep growing to maintain its longevity, perhaps taking a degree of risk off the table to reduce volatility. Annuities are only the go-to option in very specific circumstances.”
Mr Murphy has also warned that even a seemingly huge pension pot can be eroded by inflation.
Higher earners could lose even more
The potential difference becomes much larger for people making bigger contributions. Someone putting £500 a month into their pension could build a pot approaching £1million over 40 years at 6% growth. But under the lower-growth scenario, the pot could be around £558,000 – a difference of more than £400,000.
Charles Stanley wealth manager Rob Morgan warned that moving heavily into bonds and cash can carry a significant opportunity cost. He told the Telegraph: “Lifestyling approaches can come with significant opportunity cost for those not taking the traditional annuity route, moving heavily into bonds and cash at 55 or 60 can result in a strategy that is too conservative for longer-term needs, and that may struggle to keep up with inflation.”
