Nanny-state plans to force pension savers to invest cautiously ahead of retirement could cost them thousands of pounds, experts warn.
Around 850,000 workers have money in so-called ‘lifestyling’ bond funds that reduce the threat of a stock-market shock as the end of their career approaches.
The funds, which typically deliver lower returns, are a throwback to when most savers bought an annuity with their retirement pot.
Safe bet: Around 850,000 workers have money in so-called ‘lifestyling’ bond funds that reduce the threat of a stock-market shock as the end of their career approaches
But now most retirees keep their money invested and growing on the stock market while they draw down an income.
Yet the Financial Conduct Authority (FCA) has suggested making lifestyling funds the default route for do-it-yourself pension savers who are about to hit retirement age.
The watchdog fears too many are accessing their pensions without financial advice and keeping too much in cash being eroded by soaring inflation.
But critics say moving pension savings into low-risk lifestyling funds too early can be costly if you do not end up buying an annuity.
Analysis by broker AJ Bell reveals that moving retirement cash into low-risk investments too early could knock £12,000 off a £100,000 pension pot — if the fund grew at 3 per cent rather than 5 per cent over five years.
The funds invest in government bonds, or gilts, because any rise or fall in value is usually offset by increases or decreases in annuity rates.
In the five years after the pension freedoms, the benchmark 15-year gilt yield fell from 2 per cent to 0.5 per cent. At the same time, the average lifestyle fund rose by 37 per cent.
It meant savers with lifestyle funds who did not buy annuities did not lose out.
But now, experts say rocketing inflation and rising interest rates has caused the average lifestyling fund to fall by 15 per cent in the past four months, while at the same time the 15-year gilt has risen from 1 per cent to 1.8 per cent.
Losing out: Analysis by broker AJ Bell reveals that moving retirement cash into low-risk investments too early could knock £12,000 off a £100,000 pension pot
Most retirees bought an annuity with their retirement cash before the pension freedoms of 2015.
Now it is only around one in ten. Former pension minister Sir Steve Webb, of consultancy Lane Clark and Peacock, says: ‘The pension freedoms were a game-changer.
‘When everyone was heading for an annuity, there was a reasonable argument for removing the volatility and risk from your pension as you got nearer to retirement.
‘But in a world where, frankly, most people are going to cash them out in full or go into some sort of drawdown . . . it doesn’t seem to make sense.’
Laith Khalaf, head of investment analysis at AJ Bell, says: ‘Many investors probably won’t be aware this is going on, but they could be sleepwalking into a bond market nightmare.
For most pension investors, who aren’t going to buy an annuity, these funds are now totally unfit for purpose.’
Over cautious? The Financial Conduct Authority has suggested making lifestyling funds the default route for do-it-yourself pension savers about to hit retirement age
He says lifestyling investments in a pension will normally be called ‘long gilt’ or ‘long corporate bond’. It comes as the cost-of-living crisis could force people to put off retirement.
Savers who took out workplace pensions in the 1990s and 2000s, and those who paid into individual stakeholder plans in the 2000s, will have their money moved to lifestyling funds typically five years before retirement age.
More money is then moved into less volatile investments every year.
Savers need to ensure their pension provider knows at what age they plan to retire, or else lifestyling could begin too early.
Tom Selby, head of retirement policy at AJ Bell, says the FCA enforcing lifestyling felt like the ‘last vestiges of a nanny-state approach’.
He adds: ‘You’re potentially taking risk off the table too early when your pension is biggest and any growth would therefore have the largest impact.’
The FCA, which is now considering industry responses to the plans, is also proposing to introduce alerts that warn savers that their cash is being eroded by inflation.
A spokesman says: ‘Our proposals are intended to ensure people are properly supported, with pension providers designing default investment strategies that best meet their customers’ needs.
‘Reducing investment risk as people approach retirement can be useful, even for those planning to use drawdown, rather than buy an annuity or take all their savings as cash.’
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