Lifestyle Pensions in 2025
We address a question from a Boring Money reader who has recently experienced a sharp decline in the value of their Lifestyle Pension fund.
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A Lifestyle Pension in the UK is a type of defined contribution (DC) pension scheme designed to automatically adjust the investment strategy as the member approaches retirement age. The goal is to reduce investment risk and protect the pension pot from market volatility as retirement nears.
Key Features of a Lifestyle Pension:
Automatic Investment Strategy:
The pension fund starts by investing in higher-risk, higher-return assets (e.g., equities) when the member is younger and has more time to recover from market fluctuations.
As the member gets closer to retirement, the fund gradually shifts to lower-risk investments (e.g., bonds or cash) to preserve the value of the pension pot.
Target Date:
The strategy is tied to a target retirement date, which is typically the member's chosen retirement age.
Default Option:
Lifestyle pensions are often the default option in workplace pension schemes, such as those under auto-enrolment, unless the member actively chooses a different investment strategy.
Annuity or Drawdown Focus:
Traditionally, lifestyle pensions were designed for members planning to purchase an annuity at retirement, as the shift to lower-risk investments aimed to protect the pot for this purpose.
However, with the introduction of pension freedoms in 2015, many people now opt for flexible drawdown instead of annuities. Some lifestyle pensions have adapted to this by offering drawdown-focused strategies.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Past performance is not a reliable indicator of future performance. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
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If you do not require ongoing financial advice, a lifestyle pension plan can be an effective and practical solution.
Rather than relying on a financial adviser or the plan member to ensure that investments align with a client’s objectives and remain suitable, this process is largely automated. The investment strategy is pre-determined, reducing the need for ongoing monitoring or adjustments by the individual.
This type of plan attempts to offer a streamlined process from the initial setup stage, throughout the accumulation stage and to the reaching retirement stage. Providers of these plans generally offer a basic level of support when it comes to deciding on retirement options.
These arrangements are often priced very competitively, particularly in workplace pension schemes that are already established.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Past performance is not a reliable indicator of future performance. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
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A lifestyle pension is designed to make things easier by automatically adjusting your investments as you get closer to retirement. However, because it follows a set plan, it might not always adapt well to changes in your personal situation or shifts in the economy.
For instance, before the 2008 Global Financial Crisis (GFC), this approach worked well. At that time, investments like bonds (which are generally safer than stocks) provided good returns and were a reliable way to fund retirement. But after the GFC, things changed. Central banks stepped in to stabilise the economy, which caused bond prices to rise and their returns (or "yields") to drop to very low levels, sometimes even below zero. This made switching to bonds riskier for people nearing retirement.
A more recent example is what happened just before the September 2022 budget announcement under Liz Truss. During that time, bond prices fell sharply, and people who had moved their pension savings into bonds just before this could have seen significant losses in their retirement savings.
In short, while a lifestyle pension can be convenient, its one-size-fits-all approach might not always work well in changing economic conditions or for everyone’s unique needs. It’s important to keep an eye on your pension and consider whether the strategy still fits your goals, especially as you get closer to retirement.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Past performance is not a reliable indicator of future performance. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
