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Retirement savers could be missing out if they switch to “lifestyling” funds

Nanny-state plans to force pension savers to invest cautiously ahead of retirement could cost them thousands of pounds, experts warn.

Around 850,000 workers have money in so-called “lifestyling” bond funds, which reduce the risk of a stock market shock at the end of their career.

The funds, which typically provide lower returns, are a throwback to the days when most savers bought an annuity with their annuity pot.

Safe bet: Around 850,000 employees have money in so-called “lifestyling” pension funds, which reduce the risk of a stock market shock at the end of their career

But now most retirees keep their money invested and grow in the stock market while earning an income.

Still, the Financial Conduct Authority (FCA) has proposed making lifestyling funds the default route for do-it-yourself retirement savers nearing retirement age.

The watchdog fears too many are accessing their pensions without financial advice and holding onto too much cash, which is being eroded by rising inflation.

But critics say shifting retirement savings into low-risk lifestyle funds too early can be costly if you don’t end up buying a pension.

Analysis by broker AJ Bell shows that reallocating retirement money to low-risk investments too soon could take £12,000 out of a £100,000 pension fund – if the fund had grown 3% over five years rather than 5%.

The Funds invest in government bonds or government bonds because increases or decreases in value are typically offset by increases or decreases in pension rates.

In the five years after the pension liberties, the benchmark yield on 15-year government bonds fell from 2 percent to 0.5 percent. At the same time, the average lifestyle fund rose by 37 percent.

It meant savers with lifestyle funds who weren’t buying annuities weren’t lost.

But now experts say skyrocketing inflation and rising interest rates have caused the average lifestyle fund to fall 15 percent over the past four months, while the 15-year Treasury bond has surged from 1 percent to 1.8 percent is.

Loser: Analysis by broker AJ Bell shows that shifting retirement funds into low-risk investments too soon could pull £12,000 out of a £100,000 pension pot

Loser: Analysis by broker AJ Bell shows that shifting retirement funds into low-risk investments too soon could pull £12,000 out of a £100,000 pension pot

Before the 2015 pension freedoms, most retirees bought a pension with their retirement cash.

Now it’s only about one in ten. Former Pensions Secretary Sir Steve Webb of the Lane Clark and Peacock consultancy says: “Pension freedoms were a game changer.

“When everyone was headed towards retirement, there was a reasonable case for removing volatility and risk from your retirement as you neared retirement.

“But in a world where, frankly, most people are going to pay them out in full or go into some sort of drawdown.” . . it doesn’t seem to make any sense.’

Laith Khalaf, Head of Investment Analysis at AJ Bell, says: “Many investors will probably not be aware that this is happening, but they could be sleeping into a bond market nightmare.

For most fixed income investors who do not want to buy fixed income, these funds are now completely unsuitable.’

Overcautious? The Financial Conduct Authority has proposed making lifestyling funds the default route for do-it-yourself retirement savers nearing retirement age

Overcautious? The Financial Conduct Authority has proposed making lifestyling funds the default route for do-it-yourself retirement savers nearing retirement age

He says lifestyle investments in bonds are typically referred to as “long gilts” or “long corporate bonds.” It comes as the cost of living crisis could force people to delay retirement.

Savers who took out occupational pensions in the 1990s and 2000s and those who paid into single-stakeholder plans in the 2000s will typically put their money into lifestyle funds five years before retirement age.

Then more money is put into less volatile investments every year.

Savers need to make sure their pension provider knows what age they want to retire at, otherwise life could start too soon.

Tom Selby, head of pensions policy at AJ Bell, says the FCA’s enforcement of the lifestyle felt like the “last remnants of a nanny state approach”.

He adds: “You may be taking risk off the table too early, when your retirement is at its highest and therefore any growth would have the greatest impact.”

The FCA, which is now reviewing industry reactions to the plans, is also proposing to introduce alerts to warn savers that inflation is eating away at their money.

A spokesman said: “Our proposals aim to ensure that people are adequately supported by annuity providers developing standard investment strategies that best meet the needs of their clients.

“Reducing investment risk as people approach retirement can be useful, even for those planning to take advantage of a drawdown rather than buy an annuity or take all their savings as cash.”

b.wilkinson@dailymail.co.uk

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Retirement savers could be missing out if they switch to “lifestyling” funds

Source link Retirement savers could be missing out if they switch to “lifestyling” funds

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