A target dated fund (also known as a lifestyle fund) is a fund whose investments change automatically and gradually in the run up to retirement, to prepare savings for when you need to take a retirement income. The aim of these funds is to put a process in place to ready savings for retirement, without the need for the investor to make adjustments to the investments held themselves.
Most scheme members will retire at a certain age, for example, age 65 or 67. If they're invested in a target dated fund, their savings will be placed in a version of that fund which targets the year in which they plan to retire. So, for example, if an investor aims to retire in 2040, they would invest in the version of the target dated fund that targets retirement in 2040.
As retirement approaches the investments held in the target dated fund will be changed to ready savings for taking a retirement income. For example, a target dated fund might prepare savings for drawing down an income on retirement, for purchasing an annuity (a guaranteed income for life), or for cashing in their savings.
Usually this process will reduce the amount invested in riskier investments such as equities (shares in companies), recognising that investors who are closer to retirement will have less time for their savings to recover in the event of a market fall. They will also usually increase the level of investment in less risky fixed interest (bonds) investments or cash. However, different target dated funds will work in different ways, based on the end outcome that they're targeting, so it's important to read the fund's factsheet before deciding if a particular fund is right for you.
Target date funds are often used as the default fund in workplace pension schemes. A default fund is selected by the employer for each scheme, and is the fund that investors savings will automatically be placed into unless then make an alternative investment choice.
Please remember that the value of investments may go down as well as up, and investors may get back less than they invest.
You have lots of choice about how you take your retirement savings. Our website, Your Retirement Planner, has information and tools to help you think about your options.