Most UK workplace pensions have a one size fits all approach.
A couple of decades ago, the pension industry came up with what sounded like a sensible idea.
Put everyone into the same pension strategy, that starts off as high-growth, then finishes off as low-growth near retirement.
Like with all one size fits all approaches, it means they’re ideally suited to very few people, and poorly fit the rest.
So what’s the problem?
Lifestyle strategies assume you’re going to buy an annuity with your pension. Rather than choosing how and when to spend your money.
If you retire at 65, you’ll need to fund your retirement for about 30 years.
That means for many, a low-growth approach to investing, could leave you short of money in the later years of retirement.
Lifestyle strategies also assume your pension is your only retirement asset. But if you’re an expat, you’ll almost certainly have other savings built up for retirement.
So for tax reasons, it might not make sense to spend your pension first. You might want it to keep growing for the long term.
Lifestyle strategies have come under scrutiny from the UK Regulator (the FCA)
In 2017 the FCA conducted a review on lifestyle strategies – https://www.fca.org.uk/publications/multi-firm-reviews/pension-lifestyle-investment-strategies-findings
With most pensioners choosing to draw in an income from their pension assets, instead of buying an annuity, the FCA found lifestyle strategies are no longer appropriate for many people.
Why aren’t people choosing annuities anymore?
Annuities were once the only choice for many retirees, but since 2015, pensioners have more options.
Buying an Annuity
→ A guaranteed income for life or a set period.
→ Not dependent on investment returns.
→ Guaranteed by the insurance company.
→ Usually covered by a protection scheme if the insurance company defaults.
→ No capital is returned when you die.
Flexi-Access Drawdown
→ Choose when to access your pension.
→ The option to draw a regular monthly income, or ad-hoc lump sums when you need it.
→ Choose how much income to draw based on your needs.
→ The option to spend more in the early years of retirement.
→ Anything left when you die, can be passed on to your loved ones.
→ How long your pension lasts will depend on the size of your pot, and investment performance.
As you can see, if you have very limited assets to support retirement, are very risk-averse, and don’t value flexibility, an annuity could be the right choice.
But most people I speak with, want to be in control of how they use their money.
A lesson from recent history – the 2022 UK pensions meltdown
As people approach retirement, lifestyle strategies move into what were once considered ‘low-risk’ assets.
But in 2022 it became apparent that the risks for all investors weren’t considered.
Using a narrow view of investment risk, lifestyle strategies had assumed index-linked government bonds were a safe asset.
Because if those bonds wen’t down in value, an annuity would be cheaper to buy.
So the risk was theoretically offset – but only if you wanted to buy an annuity with your pension.
This had significant impact on people who wanted to use flexi-access drawdown to spend their pension.
Because their lifestyle strategy had defaulted them into investing in long-dated bonds, the changing interest rate environment meant they suffered double digit losses.
There was a significant miss-match between the time horizon of investors, and of the bonds they held.
If you wanted to take a lump sum from your pension, or drawdown on the assets inside of your pension…
You suddenly had a lot less money!
And even if you did plan to buy an annuity – avoiding those double digit losses, would have meant you could buy a larger secure income.
So what can you do?
Instead of settling for the default option, work with a financial planner to craft a portfolio that’s tailored to your own goals and objectives.
By understanding the holistic picture combining the life you want, and the money you have, you can make informed decisions about:
→ How your total wealth impacts your pension investment choices.
→ How long you need your pension to keep growing.
→ When and how you want to spend the money.
→ And invest into assets that match your time horizon.
If you found this useful, you might like our free 13 Step Financial Checklist for British expats living overseas.
Or if you’re looking for professional help with your life insurance, pensions & investments – click here to book your free initial consultation.
