Investment lifestyling in UK defined contribution pensions: what you need to know
Many UK pension savers are invested in a defined contribution pension without ever making an active investment choice. Instead, contributions are often directed into a default investment fund chosen by the pension provider, employer, trustees or governance committee. In many cases, that default fund uses a process known as investment lifestyling.
Lifestyling sounds reassuring because it suggests your pension automatically adapts as you get older. In some cases, that can be helpful. But it can also create problems if the strategy does not reflect how you actually plan to use your pension in retirement.
For many people, their pension is their largest financial asset outside their home, yet the underlying investment strategy is often left untouched for years.
What is investment lifestyling?
Investment lifestyling is an automated investment approach used in many UK defined contribution pension plans. During the early and middle years of saving, your pension is usually invested mainly in growth assets such as equities, with the aim of growing your pension pot over the long term.
As your selected retirement date approaches, the pension gradually switches into assets considered lower risk, such as bonds, cash or funds designed to reduce volatility. The idea is to reduce the chance of a large fall in value shortly before retirement.
This process is sometimes called a “glidepath”. In simple terms, the closer you get to retirement, the more cautious the investment mix generally becomes.
The Pensions Regulator expects defined contribution schemes to have appropriate default investment arrangements and to consider the needs of members who do not make active choices. That matters because many pension savers remain in the default fund for years without reviewing whether it still suits their circumstances.
Why lifestyling became popular
Traditional lifestyling made a great deal of sense when many people used their pension pot to buy an annuity at retirement. An annuity converts a pension fund into a guaranteed income for life.
If you intended to buy an annuity, moving gradually from equities into bonds as retirement approached could help reduce the risk of your pension falling in value shortly before locking into an annuity rate. Some lifestyle strategies also moved part of the pension into cash, reflecting the fact that many people took up to 25% of their pension as tax-free cash.
In other words, traditional lifestyling was built around a relatively straightforward retirement journey: grow the pension, take tax-free cash and buy an annuity.
Retirement has changed
Since pension freedoms were introduced, many people no longer buy an annuity immediately at retirement. Instead, you may choose to use income drawdown, take ad hoc withdrawals, phase retirement gradually, keep the pension invested for longer, or even leave it untouched for several years.
MoneyHelper highlights that defined contribution pension savers now have several retirement income options, including taking cash, buying an annuity or keeping the pension invested while drawing income. FCA retirement income data also shows growing use of drawdown and more varied ways of accessing pension benefits.
This creates an important issue: a lifestyle strategy originally designed for annuity purchase may no longer be appropriate if you expect your pension to remain invested for another 20, 30 or even 40 years during retirement.
You may become too cautious too early
One of the biggest risks with lifestyling is that your pension may move into bonds and cash too early. If you are in your mid-50s or early 60s, you may still have decades of investment time ahead of you.
If your pension is heavily de-risked before you actually need to draw income, you could miss out on potential long-term growth. This can be particularly relevant if you expect to continue working, retire later than planned, or use other assets first.
However, remaining invested more heavily in equities later in life can also increase exposure to market volatility and the risk of significant investment losses, particularly during periods of market stress. While higher equity exposure may support long-term growth potential, it may not be appropriate for everyone, especially where access to pension funds is expected in the shorter term or where an investor’s attitude to risk has changed.
Your target retirement age may not reflect reality
Lifestyle strategies usually work towards a selected retirement date. This could be the scheme’s default retirement age, your chosen target date, or sometimes simply age 65.
If that target date is inaccurate, the investment strategy may also become unsuitable. For example, if you plan to work until 70 but your pension targets age 60, your investments may already have shifted into cautious assets years before you need the money.
Equally, if you retire earlier than expected, your pension could still be invested more aggressively than you are comfortable with.
The strategy may not match your retirement plans
Some lifestyle funds are designed for annuity purchase. Others are designed for drawdown or cash withdrawal. These are very different retirement outcomes.
An annuity-targeting strategy may hold more bonds. A cash-targeting strategy may move heavily into cash. A drawdown-focused strategy may retain more growth assets because the pension is expected to remain invested after retirement.
The issue is that many people do not know which version they are invested in. It is easy to assume that “default” means “suitable”, when in reality it may simply be designed for an average member following an assumed retirement path.
Bonds and cash are not risk-free
Lifestyling is often described as “de-risking”, but that term can be misleading.
Bonds can fall in value, particularly when interest rates rise. Cash may feel safer, but inflation can gradually erode its spending power over time.
A more cautious investment mix may reduce short-term volatility, but it can also increase the risk that your pension does not grow enough to support a long retirement. Inflation risk and longevity risk can be just as important as market risk.
Default settings can create complacency
Perhaps the biggest issue is behavioural. Lifestyling can create the impression that your pension is being managed in a fully personalised way. In reality, it is usually a broad strategy designed for large groups of members rather than your specific circumstances.
That does not make it inherently bad, but it does mean it should not simply be ignored.
Pension investment decisions should be reviewed carefully and in the context of your wider retirement plans, financial circumstances and attitude to risk. Before making changes to your pension investments or retirement strategy, consider reviewing your options with a regulated financial adviser or your pension provider.
What should you check?
Before making any investment changes, consider seeking professional guidance to help assess whether your pension investment strategy remains suitable for your retirement objectives and risk tolerance.
If you have a defined contribution pension, it is worth asking:
- Are you invested in the default fund?
- Does your pension use lifestyling?
- What retirement age is the strategy targeting?
- Is it designed for annuity purchase, drawdown or cash withdrawal?
- Does this still reflect how you expect to use your pension?
The key point is simple: lifestyling can be useful, but only if the destination still matches your retirement plans.
Default does not necessarily mean suitable, especially if your plans, timescales or retirement objectives have changed over time. Understanding how your pension is invested, and whether that strategy still reflects your intentions, could make a material difference to the long-term value, flexibility and resilience of your retirement income.