Pension lifestyling: how it works, pros and cons

Pension lifestyling moves your pot out of shares and into bonds and cash as retirement nears. Its pros and cons depend on what you plan to do with the money.

Weighing pension lifestyling pros and cons starts with what the strategy was built for, and whether that matches how you expect to take your pot. When your switching years are near, an FCA-authorised adviser can hold your target date and fund up against how you mean to retire, and you can book that free call-back on this page's form. The value of investments can fall as well as rise, and you may get back less than was paid in.

How does pension lifestyling work?

Lifestyling is a built-in investment path in many defined contribution pensions. A retirement date is recorded against your pot, and as it approaches the fund steps down its holdings in shares and builds up lower-risk ones. Each provider sets its own timetable. Nest's retirement date funds, which it describes as "lifestyling", begin the move roughly ten years out, while Scottish Widows describes the start as normally 5 to 15 years before retirement. Your scheme's documents give the schedule that applies to you.

For some pensions the law requires it. Regulation 10A of the Stakeholder Pension Schemes Regulations 2000 says a stakeholder scheme must apply lifestyling to a member who has made no investment choice, with the switching beginning five or more years ahead of retirement. Someone who joins, or moves their date, inside those five years is lifestyled as soon as practicable. Members who joined before 6 April 2005 get it only if they ask. Workplace default funds often follow a similar pattern, and choosing where your pension is invested explains how much say you have.

Why was lifestyling designed around buying an annuity?

Many lifestyle funds are built with an annuity purchase in mind. Aegon's Universal Lifestyle Collection shows the design. The sample factsheet in Aegon's fund factsheet guide (figures as at 31 March 2023) says that from six years before the target retirement year it moves money into a Long Gilt fund and, in the final year, a Cash fund, aiming to give "more certainty about the level of annuity you'll be able to buy when you retire" and to cater for the maximum tax-free cash. Aegon's guide explains that long bonds are used "because of their inverse relationship with annuity rates, not because they are ‘safe’ investments". If bond prices fall, annuity rates generally rise, so the income a pot can buy stays roughly steady.

Not every path ends in an annuity. Scottish Widows says its lifestyling can aim at an annuity, encashment or flexible access (drawdown), and Aegon's workplace range comes in annuity, flexible and cash versions. Which one your pot is in is the first thing to find out. Each destination has its own page: pension annuities and pension drawdown.

What are the pros of pension lifestyling?

• It runs by itself. Aegon says default funds are ideal for those who prefer a hands-off approach, though it adds that they do not take your individual circumstances into account, so the fund still needs to match your plans.
• It cushions a late share-market fall. Nest says moving out of higher risk markets helps to protect savings from sharper falls, and that members told it they would rather know roughly what they have to retire on.
• It can firm up the income an annuity buys, where the pot is heading for an annuity and the fund is built for that.

What are the cons, and when can lifestyling work against you?

Slower growth. Scottish Widows warns that the approach "could restrict the potential for growth as you get nearer to retirement", and Nest accepts that you are "less likely to see any big rises in value". With many years of spending ahead, that cost adds up.

A mismatch with drawdown. A fund tuned to buy an annuity holds much of its value in long-dated bonds and cash by the target date. For a saver planning to stay invested, that mix may no longer fit. The same Universal Lifestyle Collection sample says a pot not used to buy an annuity on the retirement date stays 75% in long-dated bonds and 25% in cash until the member chooses, and that this "isn't designed for long-term investing and returns may not keep pace with inflation".

A retirement date that has moved on. The switching follows the date held on your record. Scottish Widows says that where a selected retirement age has changed, "it's important to check that your investments are still on track".

Lower risk is not no risk. The long-dated gilts that annuity-targeting strategies tend to hold can drop sharply too: on 28 September 2022 the Bank of England said market repricing was particularly affecting long-dated UK government debt. What happened to lifestyle funds that year, and how to read your own fund's factsheet, is covered in why pension investments fall. Whether your own pot sits in the wrong mix for your plans is a question for a call-back: an adviser authorised by the FCA phones you after you submit the form here.

How do you check your selected retirement date and switch out?

Your annual statement or online account should name the fund and the retirement date behind it. Nest stresses keeping that date "aligned with your life plans", and Aegon says an employer sets a target retirement age for the member and that it is "important to check that this matches your plans".

If it does not, the usual routes are a new date, a different fund, or taking the money. For a Nest pot that reaches its date untouched, Nest says it is moved to the Ready to Retire Fund or the Nest Guided Retirement Fund, and that you can change your retirement date to a later point, switch into a different Nest fund, withdraw savings or transfer out. Other providers word their rules differently, so the scheme itself should confirm how a switch works and what it does to your investments. Free guidance is available from Pension Wise, and the pages on Nest's fund options and Aviva's pension funds show how two schemes lay out their choices.

Questions people ask about lifestyling

Which pension lifestyle option suits me?

The options usually line up with a plan: buy an annuity, take cash, or stay invested for flexible income. Which of those you expect to do decides the fit. Annuity or drawdown weighs the two income routes against each other, and your defined contribution options at retirement sets out all of them.

Does lifestyling guarantee my pot won't drop?

No. It aims to reduce the chance of a large late fall, and bonds and cash can lose value or fail to keep pace with prices too.

What does a moderate lifestyle mean for a pension?

That phrase usually refers to a retirement spending standard, not a lifestyling setting. How much pension you need covers the levels.

Can I opt out of lifestyling?

Stakeholder members could opt out before it began, according to the explanatory note to the 2005 amending regulations, and Aegon says you can choose an alternative investment to its default. How to do it depends on the provider.

Weighing lifestyling against your plans

Lifestyling suits some retirements and not others. Three things settle most of it: the income you expect to take, the date your provider holds, and how far into the switching years you are. Send your phone number via the form here and the free call-back can take all three, plus any other pots, in one go. For self-directed alternatives, see the SIPP guide.