Common pension mistake that could leave YOU £88,000 worse off in retirement – the fix takes less than 5 minutes

YOU could find yourself thousands of pounds worse off in retirement thanks to a common investment strategy used by pension providers. Savers who pay into a workplace pension often have their pot “lifestyled” as they approach retirement age. A common pension strategy could knock thousands of pounds off the value of your pot Credit: Alamy We reveal whether you should opt out of pension lifestyling Credit: Getty This means your savings are gradually moved from high-risk investments into lower-risk assets such as bonds or cash between five and 15 years before the date you wish to retire. The idea is that your pension becomes less risky, so you’re reducing the chance of a big drop in value just as you’re about to retire. Sign up for the Money newsletter Thank you! But you could be missing out on higher returns – and a bigger pot – as a result. So what is lifestyling? Pension providers lifestyle your pot in order to reduce the risk its value falls Credit: Getty Lifestyling was introduced before 2015 as a way to prepare savers to buy an annuity with their pension pot. An annuity converts a lump sum of money or regular savings into a guaranteed stream of regular income for the rest of your life. But a 2015 rule change means savers no longer need to buy an annuity and can instead do pension drawdown, which allows them to take up to 25% from their pension as a tax-free lump sum and keep the rest invested. Despite this many providers have continued to ‘lifestyle’ pensions to reduce the chance that the value of your pot tumbles just as you retire. Alan Barral, financial planner at Quilter Cheviot, said: “Lifestyling can reduce pension growth at exactly the point when savers have the most money invested. Most read in Money “For savers planning to stay invested through drawdown, de-risking ten years before retirement could therefore mean sacrificing valuable compound growth at exactly the point it has the most impact.” For example, Nest assumes your pot’s growth falls from 6% a year to 4% over the final ten years before retirement. In this scenario, a 30-year-old earning £32,000 and paying the minimum level of auto-enrolment contributions could build a pot worth around £287,700 by the age of 68. But they’d only have £262,300 if their pension were lifestyled over the final decade – a difference of £25,400 or almost 9%. Meanwhile, if their returns fell more substantially to just 2% in the final 10 years then their pot would be worth £199,600 – a difference of £88,100 or 31% less. If wage growth was also taken into account then the difference could be even bigger. This is not an isolated example. According to AJ Bell, moving your pension from the IA Global Equity sector fund to the lifestyled IA Global Mixed Bond sector fund would see your returns over the last five years fall from 47% to 3%. Meanwhile, lifestyling is not risk free and could see thousands wiped off the value of your pot if things are happening in the wider economy. For example, in 2022 bond markets were rocked by Liz Truss‘s mini-Budget, which wiped thousands of pounds off the value of savers’ pension pots. How can you avoid lifestyling? There are ways to opt out of pension lifestyling, including a 5 minute trick Credit: Getty Many providers use lifestyling as their default strategy, which means you need to opt out. To check if your pension is set to be lifestyled log into your provider’s online portal or contact their customer service team. You can then make changes to your investment strategy. Rachel Vahey, head of public policy at AJ Bell, said: “Get in touch with your workplace pension and set your own investment strategy, one that actually matches your own retirement plans. “Once you are clear on whether you want cash, drawdown or an annuity, you can make sure each pension is invested in a way that supports those choices.” Is lifestyling right for me? Know the risks if you are considering opting out of pension lifestyling Credit: Getty Opting out of pension lifestyling means your savings will stay in higher-risk investments as you approach retirment. This means you could be more exposed if there’s a sudden stock market crash just before you want to access your pot. Meanwhile, if you decide to buy an annuity later on then a market dip could reduce the cash you have to buy one. Alan Barral said: “The years immediately before retirement are when your pension pot is typically at its largest, meaning significant market volatility could have a far greater impact than it would earlier in your saving journey. “This can be compounded if you are also taking an income from your pension pot.” If you opt out of lifestyling then you may not be able to rejoin it, so you’ll need to choose your own investments or pick another automated switching option. It’s important to get professional advice as you will need to manage your own risk and choose when and where to invest your funds. How can I get free pension help? YOU don't need to pay a penny until you've spoken to these government-backed experts. For everyone: MoneyHelper If you are confused about the basics or just want to make sense of the jargon, start here. It is free, impartial, and open to everyone of any age. Website: moneyhelper.org.uk Phone: 0800 011 3797 For over-50s: Pension Wise If you are aged 50 or over and have a workplace or personal pension, you are entitled to a free 60-minute appointment to talk through your options. They won’t tell you what to invest in, but they will explain exactly how you can take your money and the tax rules. Website: moneyhelper.org.uk/pension-wise Phone: 0800 138 3944 Lost a pension pot? Pension Tracing Service Think you might have an old pension from a job you left years ago? This free government tool helps you hunt down lost contact details for previous schemes. Website: gov.uk/find-pension-contact-details Phone: 0800 731 0193 Comment now