"Lifestyle Option" - thoughts

davidscot

I have just received a letter from my company pension telling me that the default pension scheme, if I choose to use it, will now be a "Lifestyle Option" rather than the current With-Profits scheme.
Anyway, had a quick look at the literature and this Lifestyle Option is one where you let the Pension Provider manage your fund rather than you doing it yourself. As I currently have my pension contributions spread over a few different funds I was wondering if anyone had any thoughts on this Lifestyle Option or have previous experience of it. Would it be better letting a professional manage my fund rather than doing it alone. Only stipulation is that I have to put 100% of my contributions into the Lifestyle Option rather than having them split as I currently do. Any help/advice much appreciated, thanks.

SuiDreams

We have this with our company. Life style option invests in 3/4 different funds dependant on your age and planned retirement age. The company should be able to tell you the funds etc. Its starts off with 100% in one fund then starts to split into different funds the closer you get to retirement to reduce risk.

davidscot

Yes, they explained that in the literature given. Main reason I was asking was if this was a good road to go down by letting them manage my fund rather than the DIY way I currently do this.

Dunnit

I am due to retire this year. If I had been in a lifestyle choice then my funds would have been moving out of shares as the price recovered. You need to ensure you understand what the life-styling involves.

davidscot

Not had a chance to have an in-depth look at the literature but think the gist of it was that you start in high risk funds to achieve better returns then as you nearer retirement it tapers down to more safer funds to protect your investment.

Your_Hero

Does this affect your company's contribution to your pension?

Most likely this change in pension has come about because of auto-enrolment, and the existing scheme is not a qualifying plan under the new law. The new pension requires a minimum contribution of 1% from your employer, increasing to 3% in 2018 (minimum total contribution 8%).

It's a very typical selection for a default fund to use the lifestyling option. However, there is a big debate about whether or not the current lifestyling option is still in the members best interest because of the recent Budget announcement. Lifestyling is designed to reduce the exposure to risky assets in your pension as you approach retirement (maybe 10 years prior). But the aim of this is so that your fund can purchase a traditional annuity without it falling in value. Since the Budget has introduced a full drawdown with no restrictions, this is no longer the most suitable 'default' strategy.

You may be able to select other funds without lifestyling, or perhaps the plan can 'switch' it off, if you feel this is not right for you.

davidscot

No, it does not affect the company contributions to my fund. I do not have to move to the default "Lifestyle" option as I am already in the With-Profits fund. As you say this may be the option open to new members of the scheme. I can use any other funds available, which I currently do, and can switch between them without penalty.

Your_Hero

Right, I got confused from your OP. You said "with-profits scheme" which tends to mean a pension plan in its own right, but in fact you have a with-profits fund.

So essentially, the letter just said the new default fund is the lifestyling option rather than your with-profit fund?

A with-profits fund has its pros and cons. It is traditionally lower risk due to the smoothing effects. But it's also fairly opaque in its structure, and it's hard to compare it vs a normal fund, since you don't know the charges etc. All depends on what your risk profile is and what you prefer.

Since you mentioned you already use various other funds, it makes sense to continue this approach if you are happy with it. Lifestyling is a one-size-fits-all approach for investors who use it, so you normally take on higher risk the further you are away from your retirement age, and reduce this risk the closer you get. This approach may not suit you (see my previous post). As I said it mainly boils down to preference and risk profile.

dunstonh

Dunnit wrote: »

I am due to retire this year. If I had been in a lifestyle choice then my funds would have been moving out of shares as the price recovered. You need to ensure you understand what the life-styling involves.

What if a crash happens between now and then?

Lifestyling is not about making the most money in the last few years but ensuring that you do not lose money without enough time to recover.

I recall some years back research that suggested that in most cases, in the last 15 year, lifestyling resulted in a lower fund. However, with a stockmarket crash of 40% occuring twice in the last 15 years, can you afford to risk your pension fund losing that much with a year or two to go?

jamesd

A lifestyle option many now be obsolete. The problem with them is that they assume that you are going to buy an annuity on a fixed retirement date. To protect the value of that pot of money from market fluctuations they gradually shift the money into investments that are likely to grow less but also to drop less.

There's no requirement to buy an annuity now and most people are retiring at ages where annuities are bad value. They start to become better value somewhere between 75 and 85 for a person in normal good health. So the key question for you to answer is whether you will insist on buying an annuity on the named retirement date or not. If you'd be content to use income drawdown, taking an income from the investments for a while or permanently, you should turn off lifestyling.

There is an additional risk with lifestyling because it tends to use fixed dates for changing things. Those dates can be very poorly chosen if they happen to involve switching out of high growth equities during a market drop. Better to delay in that case but lifestyling won't.

If you will completely ignore your pension pot and the world, go for lifestyling, perhaps, but if you'll pay attention it's better to have it off. Then you can make the appropriate changes based on your own plans at times that you pick.

However, lifestyling isn't really obsolete. A huge percentage of people completely ignore their pension pots and those people do need the protection that lifestyling offers. But anyone asking about it here is much more likely to fall into the group where it's not a good idea rather than that one.

All of this leads us to the issue that Your Hero mentioned. The correct choice is no longer assuming that everyone will buy an annuity but really to make the correct choice a person needs to be asked what they plan to do with their pot on whatever date they give. If it's drawdown then conventional lifestyling won't be appropriate, if it's buy an annuity it will be. And both of those will be wrong if a person is already picking investments and paying attention and will do their own risk management. So I hope that we will gradually see some refining of the options that are offered in the future.

With profits isn't great either, usually. Probably better for you than lifestyling but if you're already picking your own investments and they give you the option to pick your own investments for it to go into, best to do that.

To answer dunstonh's question, yes a person can afford to have a drop of 40% just before or just after because there's time to recover using income drawdown and a sensible amount of cash and bonds in the mixture. A person who doesn't know about that or who is buying an annuity without paying attention either should probably be using the lifestyling option. A person who's paying attention and planning to use drawdown should provide for it in their reserve plans and just accept it as a routine part of market movements in and before drawdown that their plan will have to survive for at least thirty years anyway with normal life expectancy. Over that timespan they can expect to see three to five drops of 30-45% in the equity part of their investments, with equity percentages in the 70-90% range being optimal for that sort of time period or longer, less for shorter time periods.

davidscot

Thanks for the replies here on this subject. To answer a few points raised, firstly yes the letter just said that the default option is now the "Lifestyling". I currently invest some of my contributions into the 'With-Profits' fund and currently the bonus at retirement is roughly £30k. I know this can fluctuate but this is current value. Anyway I am roughly 10/12 years away from retirement (earlier if possible but who knows) and currently keep an eye on my other funds which I can switch without penalty to try get the best return. Use a mix of high/med risk at the present but closer get to retirement then I would like to ringfence these investments for my pension.