Important information about lifestyle funds - March 2022

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For customers

Are you invested in a lifestyle, retirement or annuity target fund and do you know what that means?

As you approach retirement it’s important to keep a close eye on your savings. If you’re invested in a lifestyle, retirement or annuity target fund via your Aegon Retirement Choices (ARC) or Scottish Equitable pension account and are within seven years of retiring, you may have been exposed to the performance of long gilts (which are bonds issued by the UK Government that usually have maturity dates of 15 years and longer) and your plan may have dropped in value. This may be a concern, especially so close to retirement. However, it’s important to remember what our lifestyle and annuity target funds aim to do and how they invest to achieve those aims.

Lifestyle and annuity target funds were developed for savers who don’t make active fund choices. They automatically manage your investment strategy, changing as you get closer to retirement.

There are two main stages. When savers are still some way off from retirement, these funds aim to grow your savings. Then, in the six or seven years before you retire, they progressively move into investments that are designed to preserve the size of annuity (a fixed sum of money paid to someone each year, typically for the rest of their life) you will be able to buy on retirement.

How does my fund change as retirement nears?

If you’re invested in a lifestyle or annuity target fund and are within six or seven years of your selected retirement date, your fund will gradually move into long gilts and cash in preparation for purchasing an annuity when you retire. If you’ve already reached your selected retirement date, you’ll have already moved into a retirement fund which invests 75% in long gilts (long-dated UK government bonds) and 25% in cash. 

You can find out more about how our lifestyle and annuity target funds work here.

Recent performance of long gilts

Recently, long gilts have fallen in value, and this has negatively impacted the savings of lifestyle and annuity target fund investors who are close to retirement. There are a number of reasons behind this shift. As the economy recovers from the Coronavirus shock, higher global energy prices and supply chain disruption have contributed to the highest level of inflation (which is the measure of how much the price of goods, such as food or televisions, have gone up over time) for more than a decade. Gilt (UK government bond) markets are particularly sensitive to the threat of inflation, and performance is usually negative when inflation is higher or expected to increase.

Inflation is currently above the Bank of England’s target level of 2% and has surpassed even their own shorter-term forecasts.  The Bank of England has begun to unwind some of the emergency measures brought in at the onset of the pandemic and has raised interest rates in an attempt to control these price rises. Raising interest rates can put people off borrowing and encourage saving, which can help lower inflation as it tends to slow the speed at which the economy is growing. Higher interest rates also tend to lower long gilt prices, as new debt issued at a higher interest rate reduces demand for existing long gilts already in the market.

How long gilt performance affects our lifestyle, retirement and Annuity Target funds

For these types of funds, the performance of long gilts is a secondary consideration. The main reason for using long gilts in the lifestyle process isn’t to preserve or increase the value of your fund. Instead, they’re used to try to make sure the amount of pension you can buy via an annuity doesn’t go up and down dramatically in the years immediately before you retire.

Why we use long gilts

Long gilts are used in lifestyle funds because long gilt values tend to have an inverse relationship with annuity rates. This means that typically when one goes up, in normal circumstances the other will tend to go down. So, when annuity rates fall, the value of a pension pot that’s invested in long gilts will tend to go up. Likewise, when the value of long gilts goes down, this can be an indicator that annuity rates may be higher.

Holding long gilts means that the level of income you get at retirement is less likely to change dramatically if the value of long gilts or annuity rates moves up or down just before you retire.

However, the relationship between long gilt prices and annuity rates isn’t perfect and can be affected by other factors. Therefore, there will be times when movements in long gilts don’t fully reflect movements in annuity rates, and vice versa.

If you don’t intend to purchase an annuity

Lifestyle and annuity target funds are designed for those who plan to purchase an annuity when they retire, but this isn’t the only way of taking an income in retirement.

Reflecting the broader choices available, we offer a range of funds that automatically get savers ready to take a retirement income in a variety of ways. These include:

The value of an investment can fall as well as rise and isn’t guaranteed. The final value of your pension pot when you come to take benefits may be less than has been paid in.

For more information on our lifestyle funds, and to view the full range of lifestyle funds available via your Aegon Retirement Choices (ARC) or Scottish Equitable pension account, please visit the Aegon lifestyle funds hub.

We grade each fund in relation to their risk against all the other funds in our insured range. You can view your fund’s risk rating on the fund factsheet, which can be found on the ‘Fund prices and performance’ page.

Please speak to a financial adviser if you need any help in making investment decisions. If you don't have a financial adviser, you can visit moneyhelper.org.uk/choosing-a-financial-adviser to find the right one for you.

Please be aware that we do not offer investment advice.