What is lifestyling in a workplace pension default fund?

Full answer

Most people never actively choose their workplace pension investments and remain in the default fund, so understanding how lifestyling works within that default matters for almost every auto-enrolled saver. **Why lifestyling exists** Early in a working life, a pension has decades to recover from short-term market falls, so default funds typically invest heavily in equities (shares) for their higher long-term growth potential, accepting more volatility along the way. As retirement approaches, however, there is much less time to recover from a bad market year, so lifestyling gradually reduces this risk by shifting the portfolio mix towards more stable assets like bonds and cash as the saver's selected retirement date gets closer. **How the gradual shift typically works** Lifestyling usually begins a set number of years before the target retirement date (commonly 5-10 years) and progressively rebalances the portfolio, often on a set schedule (for example, moving a fixed percentage from equities to bonds/cash each year), so that by the target retirement date, the pension holds a much higher proportion of lower-risk assets than it did in earlier years. **The problem with old-style lifestyling and pension freedoms** Traditional lifestyling was designed on the assumption that most people would use their entire pension pot to buy an annuity at retirement, so shifting fully into bonds and cash made sense (annuity prices are influenced by bond yields, so matching asset types reduces the risk of buying an annuity at a bad time). Since pension freedoms in 2015 made drawdown far more common (where the pension stays invested and is drawn down gradually over a long retirement, rather than being converted to an annuity immediately), many schemes have updated their default lifestyling strategies to be less aggressive about shifting entirely into cash/bonds, recognising that money likely to stay invested for another 20-30 years in drawdown still benefits from meaningful equity exposure even after the "retirement date." **Why your selected retirement age matters** Because lifestyling is triggered by your target retirement age on record with the scheme, if this date is wrong (for example, left at a default age like 65 when you actually plan to retire much later, or plan to keep the pension invested in drawdown for decades after formally retiring), the lifestyling process could shift your pension into lower-growth assets years earlier than actually suits your real plans, potentially reducing your eventual pension value unnecessarily. **Worked example** A worker's pension scheme has a default retirement age on file of 65 and begins lifestyling 10 years before that date, gradually shifting from 80% equities/20% bonds at age 55 to around 25% equities/75% bonds and cash by age 65. If this worker actually intends to keep working and contributing until 70, and then draw down the pension gradually over a further 25+ years rather than buying an annuity at 65, the early shift into low-growth bonds and cash from age 55 onwards could mean missing out on a decade of potential further equity growth that would have suited their actual, much longer overall time horizon. **Practical tip** Check your workplace pension's target retirement age is genuinely accurate, and review whether the default fund's lifestyling strategy suits your actual plans (annuity purchase vs staying invested in drawdown) -- if not, most schemes allow you to select a different fund or adjust your target date, though this usually requires an active decision rather than happening automatically.

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