Savers warned over ‘risky’ pension strategy as retirement pots plummet

Story by Mattie Brignal

Pensions

Savers have been warned about a “risky” pension investment strategy amid a steep rise in complaints.

The number of complaints concerning pension “lifestyling” nearly tripled last year, as the collapse in the value of bonds blew holes in savers’ retirement pots.

Lifestyling is the default investment strategy for defined contribution (DC) pension schemes where the risk profile of a pension pot changes the closer you get to retirement age. 

Growth-focused stocks and equities are sold off in favour of traditionally lower-risk investments such as bonds.

Lifestyling pensions were designed for those who buy an annuity – which ensures a guaranteed income for life – as the vast majority of savers did before pension freedom rules were introduced in 2015. 

However, government bonds – known as gilts – have performed poorly since the Bank of England raised interest rates 14 consecutive times between December 2021 and August 2023.

Most bonds pay a fixed interest rate, so when interest rates rise, they become less valuable.

It means many savers have seen tens of thousands of pounds wiped off the value of their retirement pots. Those approaching their target retirement date saw the value of their assets fall most steeply.

In her Budget last month, Chancellor Rachel Reeves’ dragged private pensions into the inheritance tax net from April 2027. Annuities will also be subject to the 40pc levy. 

But pensions experts said the Chancellor’s move will change savers’ retirement strategies, encouraging them to spend their pension pot earlier, rather than leaving it as the last funds they use. This, in turn, will increase the popularity of annuities.

The pensions death tax raid also spares the public sector where defined benefit retirement deals – which cannot be inherited – are the norm. 

Tom McPhail, of pensions consultancy, The Lang Cat, said: “Lifestyling has made a lot less sense post-pension freedoms because it’s harder to know in advance what you will do with your pension pot in your 60s.

“Inheritance tax on pensions is definitely a further complication in the equation – I think annuities are going to become more popular as a result.”

Rob Burgeman, of RBC Brewin Dolphin, said it was  “unsurprising” that the number of lifestyling complaints had risen steeply.

He added: “One of the consequences of rising interest rates was to decrease the value of bonds that were priced when base rates were at historic lows. 

“When bond and gilt prices were kept high by low base interest rates, these funds ‘locked’ savers into anomalously low annuity rates.

“These lifestyle pension products have turned out to offer lower returns than anticipated. They were designed in a time when most people saving for retirement would buy an annuity, but the reality is somewhat different for many savers today.”

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If your plan is to compound your dividends, you will be aware that the last few years of compounding will equal most of the early year totals.

No guarantees but as cash is king when u retire, u could move some of your hard earned into gilts. Now gilts are risk free if you hold until maturity.

So one option would be to build a gilts ladder e.g. if you intend to retire in 2030, buy gilts that mature after that date.