An estimated 850,000 retirement savers are invested in “lifestyle” funds, the value of which has fallen 13% in the past two months, platform provider AJ Bell pointed out in a scathing attack on this type of strategy. ‘investment.
These funds invest in long-term bonds, which have sold off sharply due to high inflation and rising interest rates, with people moving into these funds as they approach retirement to protect against fluctuations in annuity rates.
But since the introduction of pension freedoms, only 10% of pension investors now buy an annuity, AJ Bell said.
Savers in their 50s or 60s automatically default to these funds as they approach retirement, but for many they are no longer fit for purpose, he said, adding that fund plans FCA’s defaults could rack up problems for the future.
Laith Khalaf, head of investment analysis at AJ Bell, said: “Lifestyle funds are a relic of a bygone era when pension rules basically meant that 90% of people bought an annuity in retirement. But these strategies are still used today, when only 10% of people buy an annuity, thanks to the retirement freedoms that were introduced in 2015. decades are only now beginning to tip retirement investors towards these obsolete funds.
“Many investors probably won’t be aware of what’s going on, but they could be sleepwalking into a bond market nightmare. That’s because high inflation and rising interest rates have caused a 13 % of the value of these funds over the past 2 months If these trends continue, things could get even worse from now on The logic behind lifestyle funds is that if they go down in value, annuity rates will rise to compensate, but that’s not much comfort if you’re not going to buy an annuity with your pension.
“These funds will often be used in older workplace pension plans run by insurers and individual stakeholder pension plans. Many of these pension providers have now updated their current investment strategies to reflect the fact that few people buy an annuity in today’s retirement market.
“But older pension plans are continuing their default investment strategy of automatically moving investors from stocks to these lifestyle funds that hedge annuity rate movements. For most pension investors, who don’t are not going to buy an annuity, these funds are now totally unsuitable.
“Investors approaching retirement should definitely take a look under the hood of their pension plans to see what’s going on, and if an automatic change takes place, then they can make an informed judgment as to whether it suits them. suits, depending on what they are going to do with their pension.
“If you think you might be invested in a lifestyle fund, check your latest valuation or talk to your pension fund. The funds in question will normally be called ‘long gilt’ or ‘long corporate bond’, and will invest in long-term securities. If you are considering buying an annuity with your pension, you might want to consider sticking to a lifestyle strategy. But if not, then you should carefully consider choosing another type of fund to get you through retirement and beyond.”