Should I stay in a Lifestyle pension

Kelvin_Hall

I am planning to retire this time last year and informed my pension scheme of this a few years ago.  The scheme lifestyle plan has been moving my money gradually into “safe” investments over the last couple of years.  I just got a statement which shows that my fund has performed really poorly in the last year and, after a little investigation, it looks like this is thanks to Miss Truss and the relative value of government gilts that my pension has been moved into.

My question is - should I change my pension profile away from it’s “lifestyle” plan asap, or is the damage down and will it recover if left in this ?

Thanks in advance.

El_Torro

If you want to buy an annuity then it makes sense to move from shares to bonds as you get closer to retirement. 

If you don't want to buy an annuity then somewhere between 40% and 60% in shares and the rest in safer bonds once you've retired generally makes sense. Opinions will vary on this. 

Do you plan to buy an annuity or draw down on your investments?

dunstonh

after a little investigation, it looks like this is thanks to Miss Truss and the relative value of government gilts that my pension has been moved into.

No, its it not Liz Truss.  She is the go-to blame person but gilts had already fell by more than half their loss before she came into power and they are currently lower than what they were at her worse point in power.

The sharp drop in October actually started the day before the budget (because of the BoE).  Yet many blamed the drop on Liz Truss and the budget.

Its a number of issues but BoE (announcing th sale of £80bn of gilts at it switched from QE to QT), Credit Crunch (the reason why had EQ in the first place), Gordon Brown (for the liquidity crisis that occurred with LDIs - that was predicted following changes he made) and Russia (for the consequences of invading Ukraine and causing the energy crisis that has helped drive inflation higher) are the big ones.

My question is - should I change my pension profile away from it’s “lifestyle” plan asap, or is the damage down and will it recover if left in this ?

The unit price may not recover in your lifetime, if every (if income units).  However, the income generated is now greater.  So, it may well recover in a decade.  Probably not earlier.     

Fixed interest securities are not like equities which will usually recover within months to a few years.  Instead, they play out over decades

Pat38493

Unfortunately in the last couple of years, the so called "safe" investments have also taken a hit, sometimes bigger than equities - apparently this can happen but it's generally considered as a rare event (maybe a couple of times per hundred years was mentioned here).

You haven't provided any details but other comments on this board were that lifestyle options on these kind of pensions are over cautious unless you are going to buy an annuity - the de-risking is a bit too much, and that's even before the unusual events of the last year.

If the change has already happened, you may want to consider at least preventing further changes by existing the lifestyle option.  Probably you need to do some more research around the topic before acting.  For what it's worth, I am going to exit the lifestyling approach on my pensions before it kicks in as I prefer to be in control of things myself.

Kelvin_Hall

Thanks for all the advice, and apologies if Ms Truss was not to blame,  I’m no expert (which is why I’m here looking for knowledge 😁).

I’m not planning to buy an annuity as I already have some final salary pensions, which I believe are similar (?).

So it’s just a pension pot that I’m looking to secure.

I’m 59 at the moment, about half my pensions are final salary and half a defined contribution pot.  My thought is that I will use the pension pot to cover the shortfall till my state pension kicks in, so it’s a relatively short time.

Pat38493

Kelvin_Hall said:

Thanks for all the advice, and apologies if Ms Truss was not to blame,  I’m no expert (which is why I’m here looking for knowledge 😁).

I’m not planning to buy an annuity as I already have some final salary pensions, which I believe are similar (?).

So it’s just a pension pot that I’m looking to secure.

I’m 59 at the moment, about half my pensions are final salary and half a defined contribution pot.  My thought is that I will use the pension pot to cover the shortfall till my state pension kicks in, so it’s a relatively short time.

Maybe if you post your full scenario - pension assets DB and DC etc you will get some more useful comments.  The fact that you also have DB pensions adds weight to the theory that you should not be using life styling, but it somewhat depends on the portion of each.  

I'm not sure the Truss budget directly caused all of the issues but it certainly didn't help, and from what I could gather on here, it caused things which were expected to happen gradually to happen suddenly as a surprise.  This is also linked with the fallout from the quantitive easing which was done since 2008 which had never really "unwound" from the markets until last year.

I've seen comments on here that Gilts and so on are now much closer to the long term expected levels so in theory, they should perform as expected going forward.  However you still have to keep in mind that long term growth on these type of products is lower than equities, and if you are already holding significant DB assets, putting your pension pot mainly in bonds is probably not the right approach.   Also according to the news this morning, they suffered another correction this week so maybe the bumpy ride is not over yet.

QrizB

Kelvin_Hall said:

I’m not planning to buy an annuity as I already have some final salary pensions, which I believe are similar (?).

So it’s just a pension pot that I’m looking to secure.

My current DC occupational pension scheme has three or four different lifestyling options, depending on whether you plan to draw down, buy an annuity or splurge it all on a Lamborghini.

Does yours give similar options?

In my case I didn't like the look of any of the lifestyles (I've got a DB pension which, with the NSP, will give me a tolerable standard of living, so I'm happy to take more risks with the DC scheme) and I've chosen to nvest directly in a couple of the multi-asset funds that underlie the lifestyle options.

OldScientist

At the moment, it is a terrible time to sell bonds since prices are low although, conversely, it is a good time to buy bonds since prices are low. So, if you remain with the lifestyling option, the bonds you will be buying will be a better buy than they were 2 years ago.

However, whether the lifestyling option is a good choice for retirement could depend on your other income. You've mentioned DB pensions - if the income from those together with your state pension are sufficient to cover most or all of your likely expenditure, then as QrizB said, you can probably take more risk with your DC pot and have more equities, if not then lifestyling might continue to be a good choice.

In terms of recovery time, one useful thing to look at is the duration of the bonds (you should be able to find it in the information about the fund - e.g., for the Vanguard Target Retirement 2025 fund, the effective duration is about 8 years) - the time taken to recover is at least the duration (this assumes no further interest rate changes - if rates drop, bond prices will go up again, if they continue to rise, then prices will continue to fall). Assuming you are around 65 years old, you have a 10% chance of living to be 96-98 (depending on whether you are male or female, see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 ), i.e., you will potentially be spending from your DC pot for another 30-35 years, so there is plenty of time for this recovery to happen.

As for the effect of the September 2022 mini-budget - to some extent it depends on whether the bonds in your fund are mostly UK or mostly global since the UK budget had little effect on the rest of the world (apart from a certain level of bemusement). Roughly 50 basis points (0.5 percentage point) of the increase in UK bond yields prior to the mini budget was driven by the anticipated increase in the base rate on 22 September and some of the other factors mentioned above, while the remaining increases (more than 100 basis points) were due to the mini budget and recovered shortly afterwards. So no need for you to apologise!

Albermarle

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JohnWinder

‘My question is - should I change my pension profile away from it’s “lifestyle” plan asap, or is the damage down and will it recover if left in this ?

The unit price may not recover in your lifetime, if every (if income units).  However, the income generated is now greater.  So, it may well recover in a decade.  Probably not earlier.     

For that to make sense to me I’ll guess it only applies if one takes the coupons and dividends from the lifestyle fund rather than having them reinvested.

‘In terms of recovery time, one useful thing to look at is the duration of the bonds …  the time taken to recover is at least the duration (this assumes no further interest rate changes - if rates drop, bond prices will go up again,.’

I can add a bit to that. Yes, ‘time taken to recover’, but my understanding is that it takes EXACTLY  one duration to recover for a bond, but for a bond fund this is an approximation. And time to recover means time to get back to the level of return the bonds would have achieved had there been no interest rate change - which is a higher value than the bonds’ value when the interest rate changed (if the yield was positive at that time).

‘if they continue to rise, then prices will continue to fall)’

But it’s not that grim. Eventually the higher yields of the new bonds will overcome the effect of price falls, such that the return you get after 2D-1 is the same as you would have got without the interest rate rise. After that it’s all jam. 2D-1 is twice the duration minus 1, so for a 8 year duration bond it is 15 years. https://www.bogleheads.org/forum/viewtopic.php?p=6922325&sid=b295fc5fc142a2fe94a80c394c93ca14#p6922325

QrizB

Kelvin_Hall said:

I’m not planning to buy an annuity as I already have some final salary pensions, which I believe are similar (?).
So it’s just a pension pot that I’m looking to secure.

Does the lifestyle fund that you're in match your investment goals?

If (for example) you're planning to remain 60% invested in equities, and 40% in bonds, does your chosen lifestyle fund achieve that goal?

My employer's scheme had an interim lifestyle scheme - the default one - that moved you to 60% equities from 13 years before retirement, tapering down to about 10% equities at retirement. Which isn't great if you're expecting to remain invested for another 20-30 years, rather than buy an annuity or a Maserati.