Death of the lifestyle pension?

The chances are that if you have taken out a pension since the early 1990s, rule changes announced in the 2014 Budget mean it’s time to check that your pension is still fit for purpose.

Many money purchase or defined contribution pensions started in the last 20 years are likely to include ‘life styling’ - a process that involves the gradual switching of your money from riskier, high growth assets to safer investments as you approach retirement.

Lifestyle pensions are intended to enable investors to benefit from stock market growth in the early and middle parts of their careers, but also to protect them from the risk of losing their money if there is a stock market collapse just before they retire. This involves the automatic switching of your pension savings, usually from equity based funds to lower risk funds, in stages during the five or 10 years leading up to your planned retirement age.

In theory, this is ideal for people intending to use their pension fund to buy an annuity, as the money is often switched into gilts, supposedly safer assets on which annuities are also based.

But changes to pension rules announced by Chancellor George Osborne mean that this protection may not only become obsolete for many investors, but could also damage their pension prospects.

The pension reforms revealed in the last Budget are expected to make life styling less attractive or appropriate for many investors. The rule changes mean that from April 2015, anyone aged 55 or more can take their entire pension pot as cash - assuming they have a money purchase pension rather than one based on their salary.

Many people are expected to reject the idea of buying an annuity in favour of drawing a regular income over retirement - even though they are investing in lifestyle pensions designed to lead them towards this end. Therefore to maintain their lifestyle in retirement, switching away from equity-based funds to reduce risk is likely to be a less popular option.

Pension experts believe that three-quarters of pension ‘default’ funds, holding some £165bn of investors’ money, use life styling strategies. This includes the vast majority of company pension schemes, personal pensions and even NEST, the new government run pension scheme for employees without access to a company scheme.

Investors who are still happy with the idea of buying an annuity on reaching retirement have no need to worry.

If you are invested in a default fund that incorporates life styling, the chances are that you have not been actively involved in deciding what happens to your pension contributions, and may feel nervous about taking control now.

Anyone who has different plans or wants to benefit from further growth by leaving their money invested while drawing down a pension income – should check that their pension funds are aiming for the same goal.

Whatever list of bewildering changes Chancellor George Osborne unveils in his next Autumn statement on the 3rd of December, a good financial adviser will help you to decide whether you should ask to opt out of the lifestyle process depending on your preferred retirement choices.

Jo Jackson is the Head of Financial Planning at Brewin Dolphin in Newcastle. She provides financial planning advice across a full range of areas, including retirement and pension planning, protection, guidance on estate planning, school fees planning and tax-efficient ways of investing.

joanne.jackson@brewin.co.uk

The value of investments can fall and you may get back less than you invested.

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Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.