is lifestyling of pensions worth it if you are not planning to take out an annuity?

peteasa

I have multiple pension funds each with different performance and the pension provider has started "lifestyling".  This means that they more these funds gradually into "safer" less volatile, perhaps lower growth perhaps cash based funds over time.  This reduces the chance that a large stock market crash will impact the value of the pension at the time the pension is taken.  This makes sense if you know that you are planning to take out an annuity where the cash value of the pension, and the time that you take out the annuity is important.

The disadvantage of lifestyling is that when the pension provider is in control they do not take money from the lowest performing funds first as you might have expected.  Instead they take money out of all the pension funds.  So you loose out if the higher performing funds are sold early.  They also move between assets at fixed times in the year and do not take into account current trends in the value of the pension funds.  So again you loose out if there is a short term dip in the market.

When considering a draw down type pension it seems even less sensible to use "lifestyling" because essentially in draw down you want the pension pot to last as long as possible so it is important to have high performing perhaps more volatile funds to provide protection against inflation for money that you will require in the longer term.  Of course you also need a suitable size of investment in "safer" less volatile funds for the short term to provide income for the short term.

So it seems better not to have any "lifestyling" applied and to keep the more volatile higher performing funds to provide income in the longer term.

Is this logic correct or am I missing something?

If this logic is correct why do the pension companies not explain this more clearly with an example like this in the first place?

If this logic is correct why do the pension companies not allow you to put some of the pension funds into "lifestyling" and protect others in the same portfolio?

ColdIron

peteasa said:

Is this logic correct or am I missing something?

In my opinion it is the right choice for many, especially for those not planning on an annuity. There may be some merit in de-risking a little but not the steep decline seen with traditional lifestyling. You might be invested for 20 years or more after retirement

If this logic is correct why do the pension companies not explain this more clearly with an example like this in the first place?

Mine did, I think many others do too

If this logic is correct why do the pension companies not allow you to put some of the pension funds into "lifestyling" and protect others in the same portfolio?

Most will allow you to increase your retirement date to defer lifestyling

Coppice10

Mine has Lifestyling funds targeted at your retirement date - so mine is imaginatively named something like Target 2045. I just switched my money from that fund to the one named Target 2055 - which assumes ill retire much later and lessens the effect of Lifestyling. 

Pat38493

I suppose another way to pose the question is - do you want your pension provider to alter your fund balance at a future fixed date, without informing you and regardless of current market conditions, even if there has just been a huge equities crash or suchlike?

For me at least the answer is no, so any de-risking I do will be by my own planning decision.

MeteredOut

Pat38493 said:

I suppose another way to pose the question is - do you want your pension provider to alter your fund balance at a future fixed date, without informing you and regardless of current market conditions, even if there has just been a huge equities crash or suchlike?

For me at least the answer is no, so any de-risking I do will be by my own planning decision.

I suspect most pension providers DO inform customers that this will happen. The issue is that it is done at product inception and many people do not read the documents. I do think it would be beneficial for the providers to remind people in proximity to the proposed switch to ensure it is still what the customer wants.

Hoenir

If you believe that you can consistently identify future high perfoming investments. Then the risk is all yours to take. A key point to remember is that the stock markets are not the real economy, but instead, a leading indicator of where investors think the economy will go. Following the herd can on occcasions lead to walking over a cliff. Bear markets can be extremely brutal and the recovery that follows taking many years. 

Lorian

On some schemes you can delay the onset of the lifestyling by increasing your target retirement date.  (Not the type coppice mentioned)

leosayer

Pension providers don't know anything about your life expectancy, health, tolerance for volatility, level of knowledge about financial matters, family circumstances, your own financial circumstances including other pension arrangements, whether you want an annuity or drawdown or even know the difference. 

It's hardly surprising that pension providers have taken account of the lowest common denominator when assessing their approach to lifestyling. However as we have seen, this approach has caused a number of people to be displeased with the performance of their pensions following the recent sell off in low risk assets however this only really impacts those looking to drawdown, not those looking for annuities.

I'm sure the same people would be complaining far more if their pension pots dropped 40% just before they retired due to an equity market crash even if it might work out fine for them in the long term. Don't underestimate the panic that can set in and the damage you could do if your 'life savings' are decimated.

Retirement planning requires in-depth understanding of all financial, lifestyle, emotional and health aspects of each individual and it changes over time. Trying to find a one-size-fits-all approach that involves increasing exposure to assets with high volatility is not a place where pension trustees will ever want to go. That's why we have financial advisors and boards like this.

If you personally have decided that you need exposure to higher risk assets then go ahead fill your boots and stop lifestyling. I did that 10 years ago and I am very glad that I did even if there have been some quite scary moments along the way.

Albermarle

So it seems better not to have any "lifestyling" applied and to keep the more volatile higher performing funds to provide income in the longer term.
For some people this would be the right approach. However most older investors are relatively cautious, so some derisking is normal. The question is more, do the lifestyling options derisk a bit too much? Probably yes.

Is this logic correct or am I missing something?

If this logic is correct why do the pension companies not explain this more clearly with an example like this in the first place? What you so clearly explained would go over the head of the large majority of pension clients, that is the ones who would actually read it at all.

If this logic is correct why do the pension companies not allow you to put some of the pension funds into "lifestyling" and protect others in the same portfolio? As already mentioned in a previous post they are trying to apply a one size fits all approach to a client base that is largely disengaged with a product they only dimly understand.

Bostonerimus1

There are numerous discussions and academic papers on asset allocation in retirement with most concluding that a high equity allocation has the best outcomes. That does not address sequence or returns risk which was the main reason to shift into fixed income if you were going to buy an annuity and would be a big problem if you had a market crash at the beginning of drawdown.

dunstonh

is lifestyling of pensions worth it if you are not planning to take out an annuity?

Could be.

Lifestyling doesnt come in one form.  It can be in many different forms.  Annuity purchase is just one form.    Another could be lifestyling on the 25% as only the 25% will be taken up front.

If you don't intend to use the 25% up front then you wouldn't use lifestyling.