Why would I have to switch funds?
Because, when you get close to retirement (usually within seven years), your fund will automatically start moving into investments better suited to the outcome it’s targeting. So, for instance, a lifestyle fund that is targeting an annuity outcome will move into long gilts and cash as you get close to retirement.
Long gilts are UK government bonds with maturity dates of 15 years or longer. They're essentially a loan to the UK government in exchange for interest. At the end of the loan period, investors get back the original loan amount. They're considered relatively safe simply because they're backed by the government, but because they're traded in the markets they can still go up and down in value.
While long gilts are a good guard against changes in annuity rates just before you retire, they may not be the best option if you’re intending to stay invested for 10, 20 or even 30 years in retirement.
If your lifestyle fund is targeting a flexible outcome, your fund will gradually move into a lower risk mix of investments as you get closer to retirement. At retirement, you'll remain invested in the markets which means your pension pot is still exposed to the ups and downs typically experienced by investments. You may prefer the security of a guaranteed income, in which case you may be more comfortable in a lifestyle fund that is targeting annuity purchase.
What is an annuity?
An annuity is a guaranteed yearly income for life. At retirement, you can buy an annuity with your pension savings.
The size of annuity you get depends on:
- The size of pension pot you’ve built up
- The annuity rates on offer – you should shop around for the best ones
- Any extra features you want, like a spouse’s annuity or any annual increases in line with inflation
- Your health – if you’re in poor health you may be able to buy a bigger annuity
Why buy an annuity?
Once you’ve bought an annuity, you have the security of knowing that your money won’t run out in retirement.
What’s the catch?
Annuity rates can fluctuate and you may not be able to secure enough income to live on. You lose control of your savings and may not be able to pass them on to your family.
Choosing an alternative fund
Your choice of funds depends on your current pension plan. You may not be able to choose another lifestyle fund1. To find out about your fund options, please log in to your account or find the fund list that applies to your pension plan on our fund prices and performance pages.
Your choice of fund is important so you may want to ask your financial adviser for help choosing alternatives. MoneyHelper gives free and impartial guidance to help make your money and pension choices clearer. If you don't have a financial adviser, you can visit MoneyHelper to find the right one for you. There may be a charge for financial advice.
Although we can’t give you advice, we can help you understand your options, including: