When you get closer to retirement, you may naturally start paying more attention to your pension.
You’ll want to protect what you’ve accumulated over the years, while ensuring that your money continues to work hard for you.
At this stage of your life, you may think about employing a strategy known as “pension lifestyling”.
On the surface, this might sound wise. As you approach retirement, you or your provider would reduce investment risk to avoid a sudden period of volatility from harming your pension savings.
However, before you accept this approach, it’s vital to ask yourself whether it truly suits the way you plan to retire.
While it might work well for some people, this doesn’t mean lifestyling will automatically work for you.
With this in mind, continue reading to discover how pension lifestyling works, and why it’s important to account for the benefits and downsides before considering the strategy.
Pension lifestyling is an approach that gradually reduces your investment risk
When you’re many years away from retirement, you may invest your pension in typically higher-risk assets, such as equities.
While assets with a higher risk profile don’t guarantee success, they have historically delivered more competitive returns. Plus, the longer you’re invested, the more time you give your portfolio to potentially recover from periods of downturn.
Over time, pension lifestyling means you or your provider would gradually shift your money into typically lower-risk investments, namely bonds or cash funds.
This strategy was originally designed for people who wished to purchase an annuity.
When you do buy an annuity, you essentially convert some – or all – of your pension savings into a guaranteed income.
If markets fell just before you did buy one, your income could drop considerably. Lifestyling would have reduced this risk by moving your money into steadier investments ahead of time.
If you know you wish to purchase an annuity when you reach retirement, pension lifestyling may still align with your goals.
Indeed, lowering your exposure to short-term market swings might protect the value of your guaranteed income at a crucial time.
You may also prefer lifestyling if you want a lower-maintenance investment strategy.
Once you or your provider start moving your pension wealth into lower-risk assets, you may not feel the need to constantly monitor the performance of your investments.
You may find this “glide path” into retirement to be reassuring.
Pension Freedoms give you more control than ever over how you take your pension
It’s important to note that since the government introduced Pension Freedoms in 2015, you now have much greater flexibility over how you access your pension.
You no longer have to purchase an annuity with your savings immediately.
Instead, you can leave your pension invested and draw an income from it gradually through “flexi-access drawdown”.
With this strategy, you can adjust your withdrawals to suit your needs and respond to changes in markets or personal circumstances.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Since your retirement no longer revolves around a single set-in-stone date, the traditional lifestyling approach may not necessarily suit you.
For example, it assumes you will retire at the age you selected when you first joined your pension scheme.
However, your plans will often change, and life rarely follows a fixed timeline.
You may decide to retire earlier than expected due to proactive saving. Or, you might continue working longer or transition gradually into retirement if you don’t want to leave the workforce just yet.
If you do retire sooner than you planned, you could leave part of your pension invested in higher-risk assets when you begin drawing an income.
Conversely, if you delay retirement, you or your provider might have already moved your money into lower-risk investments, potentially limiting growth for longer than necessary.
It’s also vital to think about how long your retirement might last
You should also consider the length of your retirement.
According to the BBC, there were an estimated 16,650 centenarians living in the UK in 2024, a record high.
This means you may spend a significant amount of time in retirement – perhaps as much as 40 years – drawing from your pension.
Over this time, inflation may steadily erode the purchasing power of your savings.
If you move too much of your pension wealth into bonds or cash and remain there for decades, your savings may struggle to keep pace with rising living costs.
Or, if you rely on flexible withdrawals, limited growth could increase the risk that you deplete your pension earlier than you intended.
Of course, higher-risk investments never guarantee better returns, and markets can fall as well as rise.
Still, moving to low-risk assets too early could considerably affect your long-term financial resilience.
We could help you choose a pension strategy that takes your goals into consideration
Rather than accepting lifestyling as a default strategy, it’s worth reflecting on what you truly want from retirement.
You should ask yourself:
- “When do I realistically expect to retire?”
- “How do I plan to access my pension?”
- “How comfortable am I with short-term volatility?”
- “How long does my income need to last?”
Building your pension strategy around your goals, rather than a preconceived notion that there’s a “one size fits all” approach, could help ensure it continues to support you long into retirement.
A financial planner could help you make an informed decision that isn’t based on assumptions.
We could use detailed cashflow modelling software to show how different strategies could affect your retirement income over time.
Read more: How cashflow planning turns numbers into possibilities
We can factor in inflation, market fluctuations, and potential changes in your circumstances. Modelling various scenarios could allow you to see how adjusting your investment risk might affect your long-term security.
The Financial Conduct Authority does not regulate cashflow planning.
Rather than following a preset glide path, we can help you make decisions based on fact.
To find out more about how we can help, please contact us by email at info@investmentsense.co.uk or call 0115 933 8433.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
