Have you lost money through pension lifestyling? Please email: money@telegraph.co.uk
Holly* never imagined working past 65. After decades of nine-to-five as a receptionist, she was looking forward to spending her twilight years caring for her new born granddaughter.
In December 2021, 18 months before her expected retirement date, she received a statement showing that her pot had grown to a healthy £740,000.
But when she checked just three months later, the value of her investments had plummeted to £400,000.
“I was absolutely devastated,” she said. “It came as a horrible shock. At first I thought I was being scammed.”
Holly had fallen victim to pension “lifestyling” – –an investment strategy pitched as a way to take the risk out of retirement.
Lifestyling involves growth-focused stocks and equities being sold off in favour of traditionally lower-risk investments like bonds – as well as cash – in the years leading up to retirement.
It is the default strategy for defined contribution (DC) pension schemes, meaning most providers will rebalance members’ investments in this way unless they opt out.
One problem is that buying a bond is no longer low-risk. Government bonds – known as gilts – have performed poorly since the Bank of England raised interest rates from near-zero to 5pc between 2021 and 2023.
Most bonds pay a fixed interest rate, so when Bank Rate rises, they become less valuable. It means many savers have seen tens of thousands of pounds wiped off the value of their retirement pots after being told “de-risking” was the sensible thing to do.
For Holly, her diminished wealth has ruined her retirement dream. Now aged 66, she has been forced to keep on working – as a personal assistant at a law firm – and is not sure when she will be able to retire.
“I couldn’t look after my granddaughter because I was working, so her parents had to pay for childcare. I still can’t help and she’s nearly two.
When she contacted her provider, Aviva, she was told that three-quarters of her portfolio had been invested in long-dated government bonds (known as gilts), which had fallen in value considerably.
She is frustrated with Aviva and Origen Financial Services – a firm hired by her employer to explain investment options to staff. Holly claimed she had told Origen that she wanted a low-risk strategy and not to worry about her pension until the time came to use it.
“They said lifestyling was a ‘safe bet’, but it wasn’t.”
She added that it was “appalling” people in her position were not informed of the potential risks of lifestyling – or notified if their investments were falling.
Lifestyling pensions were designed for people who buy an annuity – ensures a guaranteed income for life – as the vast majority of savers did before pension freedom rules were introduced in 2015.
However, the rule change meant a greater number of savers have opted to “draw down” chunks of their pension while keeping the rest invested.
For savers in this position, investing in bonds and cash rather than equities will usually mean lower returns in the long run. Despite this shift, lifestyling has remained the default option.
Adam Walkom, a financial planner at Permanent Wealth Partners, said lifestyling is a “weapon of wealth destruction” based on a misunderstanding of the concept of risk in retirement.
He added: “Lifestyling tries to reduce a narrow definition of ‘risk’ which is the volatility of the pension coming up to retirement.
“This is based on the antiquated idea that people need a lump sum of cash to buy an annuity – and they don’t want its potential value to change drastically.
“The key risk of any retiree is not the volatility of their assets – it’s running out of money before they die.
“You run out of money when assets grow less than inflation over the years.
“With lifestyling, pensions will sit in cash and bonds which will grow far less than if they were in equities, and are almost guaranteed not to grow faster than inflation over a long period of time. It’s like putting a shoebox of money under the bed.”
The concept that bonds are low-risk has also been “completely disproven” by Liz Truss’s disastrous mini-Budget, he added. The slew of unfunded tax cuts announced in September 2022 sparked a market confidence crisis, causing borrowing costs to soar and bond prices to collapse.
Holly has taken her case to the pensions ombudsman, but she doesn’t hold out much hope of it finding in her favour.
Mr Walkom said he can understand the anger of people in Holly’s position.
“Lifestyling has caused a permanent loss of capital, exactly what it claims not to do.
“95pc of the population don’t understand pensions. When letters are sent, they don’t understand them. These are the people lifestyling ends up hurting.
“This is a slow-ticking time bomb. People won’t work this out until it’s too late. ‘Why haven’t my investments grown?’ ‘Because we moved it into bonds.’ ‘But I never understood any of this.’ ‘Well, too bad, it was in our small print.’ These are the conversations that people have.”
Pension providers had an “enormous responsibility” to better inform customers of the true risks of the strategy and how their investments were performing, he added.
An Aviva spokesman said: “We have fully investigated our customer’s concerns and have found the value of their pension pot fell due to unprecedented market volatility during 2022.
“We can’t comment on the Lifestyling investment strategy for this specific scheme because that would have been agreed by the adviser with the employer when the company pension was set up.
“Generally, we believe Lifestyling as an investment strategy is an appropriate mechanism to reduce risk approaching retirement. The intention is to reduce risk, but this cannot be guaranteed, particularly when investment markets are especially volatile.
“We encourage pension savers to seek financial advice when considering their options or taking significant action.”
An Origen spokesman said: “Whilst we sympathise with their situation, in this instance the customer chose not to receive financial advice from Origen on their workplace pension scheme.
“While workplace pensions offer a convenient way for employees to save for retirement, personalised financial advice can help individuals tailor their retirement plans towards their financial goals.
££££££££££
Remember if you buy a government gilt and hold to maturity the payout is guaranteed, any other action is a gamble for meagre returns.
