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A lifestyling alternative to Target Date funds

This article is part of
Guide to Target Date funds

Currently the most common form of default fund for pension schemes is ‘lifecycle’, which mechanistically changes asset allocations over time based on age.

Switches happen automatically with a lifestyling approach, so regular pension savings reviews can focus on whether the lifestyling option chosen is still appropriate.

Without lifestyling your clients would need to make changes, as they thought appropriate, to their investment choice as they approached their retirement age.

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Depending on the lifestyling option, Stan Russell, retirement income expert at Prudential, says your savings may be moved into an investment type, such as gilts, that has a closer relationship to how a pension income is calculated.

Therefore, if the value of that type of fund goes down, the cost of providing a pension income could also be expected to reduce.

If on the other hand, the cost of buying a pension increases, then that fund would also be expected to increase in value as well.

When you take your benefits, current tax rules allow you to usually take up to 25 per cent of your pension savings as a tax-free cash sum.

To help make the amount of that lump sum more predictable for you, Mr Russell says the lifestyling process may move part of your money as you approach retirement into a cash or deposit fund and protect it from falls just before you retire.

However Mr Russell notes the design of the lifestyle option is based on a provider’s long-term expectations of how funds might perform.

As it is a fixed strategy, he warns it does not take account of changes in economic or market conditions that might occur in the future.

For instance, your client may find that funds do not keep pace with inflation or the automatic switches of your pension savings between funds happen at times that may not prove to be the best for you.

As a result, with lifestyling Mr Russell points out your savings may be moving into a fund, or funds, that could prove to be a poorer investment option than your current fund or funds.

Your savings, depending on your lifestyling option, may also be moved into a fund that is closely linked to pension income rates (or annuity rates) at the time when these rates are not at levels that meet your needs, he adds.

The available lifestyling option may not exactly match your needs, he adds.

For example, it may be designed to help match to pension income rates - or to help make a possible lump sum at retirement more predictable.

Mr Russell notes you may not be saving towards those aims in the same proportions that the lifestyling option is aiming to deliver.

He says: “Lifestyling works towards your originally planned retirement age. If you decide to take your benefits before or after that age then lifestyling is not working towards your actual retirement date, as funds may not be switched at the right time.