Lifestyle Pension Fund

Published / Last Updated on 20/06/2015

Lifestyle Automatic Pension Fund SwitchingLifestyle Pension Fund Profiling.

What a lifestyle fund does is it automatically takes away the requirement for you to think about investment risk when planning your pension.

In very simplistic terms, if we look at the risks of different funds:

  • Stock market funds are predominantly higher risk
  • Bond funds and gilt funds which are dropping down to medium risk, so a lower risk
  • Cash funds which are considered low risk

Automated Switching

Looking at retirement planning in general, when you're young you may consider higher risk funds.

Once you into your 50s you may be wanting to ‘crank down’ that risk and look at medium and low risk funds such as like as a fixed interest in bond funds.

As you are shortly getting closer to retirement you may not want be exposed at all to any stock or bond markets and move your pension to a cash fund just in case the stock-market crashes.

That is what a lifestyle fund does.

A lifestyle fund automatically switches your profile at different ages to hold different proportions of stock market funds, fixed interest and cash funds as should have more stable time funds right towards retirement, it automatically switches you into a lower risk funds.

Minus points of lifestyle funds

We are not fans of lifestyle funds as a general fund because a lifestyle fund will automatically switch you to a lower risk profile at a given age or point in time and it may not be the best time to switch in/out of certain fund sectors. What if the day before you are automatically switched, the stock market has fallen i.e. your pension fund goes down in value and then after you have switched say to a cash fund, the stock market recovers the next day and you miss out on that recovery growth because you are now out of the market.

Company Pension Default Fund

Some people may prefer automatic switching with lifestyle funds and for others it may be the ‘default’ position for your employer’s company pension scheme that you have automatic lifestyle fund options unless you want to take professional advice e.g. from ourselves or from an in-house adviser or indeed self-advise (if you self-manage).

How much is switched?

This depends upon the lifestyle fund profile.  Some funds will automatically change fund profile at given ages, others will have slightly different fund make ups or trigger points. Example lifetyle fund profile at different ages

  • Age 54 - 100% in Equity/Stockmarket fund, 0% Bond/Fixed Interest Fund, 0% Cash Fund
  • Age 55 - 100% in Equity/Stockmarket fund, 0% Bond/Fixed Interest Fund, 0% Cash Fund
  • Age 56 - 80% in Equity/Stockmarket fund, 20% Bond/Fixed Interest Fund, 0% Cash Fund
  • Age 57 - 60% in Equity/Stockmarket fund, 40% Bond/Fixed Interest Fund, 0% Cash Fund
  • Age 58 - 40% in Equity/Stockmarket fund, 60% Bond/Fixed Interest Fund, 0% Cash Fund
  • Age 59 - 20% in Equity/Stockmarket fund, 80% Bond/Fixed Interest Fund, 0% Cash Fund
  • Age 60 - 0% in Equity/Stockmarket fund, 80% Bond/Fixed Interest Fund, 20% Cash Fund
  • Age 61 - 0% in Equity/Stockmarket fund, 60% Bond/Fixed Interest Fund, 40% Cash Fund
  • Age 62 - 0% in Equity/Stockmarket fund, 40% Bond/Fixed Interest Fund, 60% Cash Fund
  • Age 63 - 0% in Equity/Stockmarket fund, 20% Bond/Fixed Interest Fund, 80% Cash Fund
  • Age 64 - 0% in Equity/Stockmarket fund, 0% Bond/Fixed Interest Fund, 100% Cash Fund
  • Age 65 - 0% in Equity/Stockmarket fund, 0% Bond/Fixed Interest Fund, 100% Cash Fund

Summary

In summary, lifestyle funds are automatic switching funds where in your younger years you have mainly stock market funds inside your pension and in the latter years, your risk is automatically ‘cranked’ down risk to fixed interest funds, bond and gilt funds and then just before retirement (which may be anything between 1-5 years away) starting to switch you fully into cash funds just to protect you from stock-market volatility.


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