Why 'lifestyling' could destroy your pension pot

Lifestyling is supposed to mean that your pension pot becomes more secure the nearer you get to retirement. Yet your pension provider might be switching you to overpriced, and therefore riskier, investments.

Many retirement savers have chosen the 'lifestyling' option in their pensions.%VIRTUAL-SkimlinksPromo%
This option sees their pension provider slowly and automatically take their funds out of shares and put them into other assets that are meant to be safer. However there are growing fears these other assets aren't so safe after all, and nor, therefore, is lifestyling in general.

A recent Axa Life Europe poll of financial advisers shows that the majority of them believe lifestyling pensions are more risky than they were a year ago.

The problem is that these funds typically move your money gradually from shares into bonds – and it's bonds that are currently the biggest concern.


So much for safety
Bonds are loans from pension savers and other investors to governments and companies. There is the risk that these borrowers will default but, on average, the short-term risks for bondholders are relatively low. The problem is, when the price of bonds is high, they can become far more risky to buy than shares.

Bonds have become expensive because too many people have been buying them, driving up their prices and making them ready for a fall. Worse, the government has been printing money and using it to buy bonds, which has raised prices even more.

You wouldn't want to buy goods on the high street at a high price, and nor should you want to buy investments at a high price either.

This is why advisers are currently concerned about lifestyling.

Don't just take their word for it
The problem of using bonds for safety today was recently highlighted by the greatest living investor. Warren Buffett, chairman and CEO of the phenomenally successful conglomerate Berkshire Hathaway, recently said that bonds are "terrible investments now... Bonds are priced artificially. You've got some guy buying $85 billion[-worth] a month and that will change at some point. And when it changes people could lose a lot of money if they are in long-term bonds."

Buffett's referring to the US and to the money-printing, bond-buying programme of the Federal Reserve (the US central bank). Nevertheless, similar conditions are occurring in the UK and many other countries. The Bank of England has printed money on an unprecedented scale and has bought bonds with much of that money.

Lifestyling is a dubious concept
The nub is that anyone who's automatically having their pensions lifestyled for extra safety are currently getting the reverse: they're moving into what now are probably more-overpriced investments.

This could be particularly devastating for those retiring soon. Potentially, some pension savers using lifestyling have unknowingly locked in their stock-market losses after the crashes in 2000 and/or 2008 when their pension providers automatically sold shares at those market bottoms in order to move into bonds.

Now bonds look overpriced too, making them more at risk of crashes. If bond prices collapse in the coming years, many retirees might be lucky to have a fraction of the pension they hoped they'd get in the late 90s.

An alternative to lifestyling
One alternative is to save for retirement more quickly. Once you have as much as you need for the future, plus quite a bit extra to account for potential inflation, you then get out of both shares and bonds altogether, moving your money into cash funds. You will miss out on future gains, but you've locked in the pot you believe you'll need.

There are significant dangers to this, such as underestimating inflation or your future needs. The largest problem, however, is that many – perhaps even most – people won't ever reach the retirement pots they desire, even if they stick with shares until their planned retirement date and there is no collapse in share prices immediately before.

As a result asking pension savers to save even faster is simply unrealistic.

Another alternative to lifestyling
Some people hope to keep on investing their pot after retirement, and take money from that pot when they need it to supplement their retirement and other state benefits. This is known as income drawdown.

This is a fantastic idea if you have the knowledge, experience and temperament for investing, but, even if you do, you still won't dramatically improve your living standards in retirement if your investment pot is too small.

It could well be that, unless you put a very large amount of money into your retirement plans, you're likely to be disappointed. This is the same whether you're saving in pensions, share ISAs, property or anything else.

Nothing can make up for a small pot
Most people are either unwilling or unable to save enough to provide the retirement income they think they'll need. Many don't even know how much they need.

All this puts them at even greater risk if their lifestyled funds go wrong.

The good news is that, while some are surprised how expensive their retirement is, many more find they need far less to live on than they thought.

The bad news is that, if you're not able to save enough by the time you want to retire, your only real choices are to live on a very stringent budget or to keep working, at least part time.

The universal solution
I think the best thing that anyone can do to prepare for retirement is to make mental preparations: get yourself used to the idea that you might have to work far longer than you currently want or expect. The earlier you prepare yourself psychologically for this significant possibility, and start thinking about how you can try to turn it into a positive experience, the less painful it's going to be when it happens.

The additional advantages are that this gives your pot time to recover if it crashes just at the point you wanted to retire, and your pot won't have to stretch for as many years when you finally do hang up your clogs.

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Why 'lifestyling' could destroy your pension pot
Figures from charity Age UK show that 29% of those over 60 feel uncertain or negative about their current financial situation - with millions facing poverty and hardship. Even though saving for retirement is not much fun, the message is therefore that having to rely on dwindling state benefits in retirement is even less so. To avoid ending up in this situation, adviser Hargreaves Lansdown recommends saving a proportion of your salary equal to half your age at the time of starting a pension. In other words, if you are 30 when you start a pension, you should put in 15% throughout your working life. If you start at 24, saving 12% of your salary a year should produce a similar return.
Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.

The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

Around 427,000 households in the over-70 age groups are either three months behind with a debt repayment or subject to some form of debt action such as insolvency, according to the Consumer Credit Counselling Service (CCCS).

Its figures also show that those aged 60 or older who came to the CCCS for help last year owed an average of £22,330. Whether you are retired or not, the best way to tackle debt problems is head on.

Free counselling services from the likes of CCCS and Citizens Advice can help with budgeting and dealing with creditors.

Importantly, they can also conduct a welfare benefits check to make sure you are receiving the pension credit, housing and council tax benefits, attendance and disability living allowances you are entitled to.

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The average UK pensioner household faces a £111,400 tax bill in retirement as increasing longevity means pensioners are living on average up to 19 years past the age of 65, according to figures from MetLife. And every year in retirement adds an extra £5,864 in direct and indirect taxes based on current tax rates to the costs for the average pensioner household. You can be forced to go bankrupt if you fail to pay your taxes, so it is vital to factor these costs into your retirement planning.It is also important to check that you are receiving all the benefits and tax breaks you are entitled to if you want to make the most of your retirement cash.

The cost of a room in a care home in many parts of the country is now over £30,000 a year, according to figures from Prestige Nursing and Care. So even if the prime minister announces a cap on care costs - last year the economist Andrew Dilnot called for a new system of funding which would mean that no one would pay more than £35,000 for lifetime care - families will still face huge accommodation costs. Ways to cut this cost include opting for home care rather than a care home. Jonathan Bruce, managing director of Prestige Nursing and Care, said: "For older people who may need care in the shorter term, home care is an option which allows people to maintain their independence for longer while living in their own home and should be included in the cap." However, the only other answer is to save more while you can.
Older Britons are often targeted by unscrupulous criminals - especially if they have a bit of money put away. For example, many over 50s were victims of the so-called courier scam that tricked into keying their pin numbers into their phones and handing their cards to "couriers" who visited their homes. It parted consumers from £1.5 million in under two years. Detective Chief Inspector Paul Barnard, head of the bank sponsored dedicated cheque and plastic crime unit (DCPCU), said: "Many of us feel confident that we can spot fraudsters, but this type of crime can be sophisticated and could happen to anyone." The same is true of boiler room scams that target wealthier Britons with money to invest, offering "once-in-a-lifetime" opportunities to snap up shares at bargain prices. Tactics to watch out for include cold calling, putting you under pressure to pay up or lose the opportunity for good, and claiming to have insider information that they are prepared to share with you.
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