What is a lifestyle fund?

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Lifestyle funds were developed primarily for the large numbers of pension scheme members who don’t make an active fund choice. They automatically manage their investment strategy from first joining the scheme right up to retirement. To do this they generally follow a two stage process:

  • Growth stage – when members are still some way off from retirement
  • Lifestyle stage – when members are getting close to retirement (within six to ten years usually)

More about the growth stage

There are a wide variety of funds available but all seek to grow investors’ savings, usually by investing in a combination of different investment types (such as shares, bonds, cash and property). Many target a certain risk level so scheme members can choose how much risk they want to take in the growth stage, from cautious through to adventurous.

More about the lifestyle stage

Currently, most lifestyle funds (including Aegon’s) assume scheme members are going to buy an annuity (pension) at retirement. They rely on scheme members having a fixed retirement age. Between five and ten years before the selected retirement age, most will start to move out of the investments held in the growth stage into investments designed to help preserve the size of pension an investor can buy at retirement. These investments tend to be long gilts (government bonds with maturity dates of 10 years or more) or long-dated corporate bonds (those issued by companies or local government bodies). They will also move money into cash (currently 25%) to cater for scheme members’ tax free cash entitlement.

This process is gradual and at retirement the member will be moved into a Retirement fund which has 75% invested in long gilts and 25% invested in cash. They will stay in this fund until they buy an annuity. The Retirement fund isn’t designed for long-term investment as it may not keep pace with inflation.

The reason long gilts and bonds are used is that they have an inverse relationship with annuity rates. This means that, if the value of long gilts and bonds goes down, annuity rates (which determine how much pension you can buy) will go up. So, even if a member’s fund value goes down just before they retire, they’ll be able to buy roughly the same size of pension, although the relationship isn’t perfect.

How lifestyle funds are likely to change

People’s working patterns have changed radically in recent years, with many retiring later or phasing their retirement over a number of years instead of taking their pension at a fixed age. More and more people are using income drawdown and keeping their money invested longer.

All these changes mean lifestyle funds need to adapt.  That’s why Aegon is already developing a new suite of lifestyle funds to address the changing needs of retiring investors.

These funds are designed for savers who plan to buy an annuity on retirement. If you don’t want to buy an annuity, or don’t know how you’ll take a retirement income, these funds may not meet your needs.

You may also want to find out about our Flexible Target funds, designed for those want to keep their options open.

The value of investments may go down as well as up, you may get back less than you originally invested. We review these funds regularly and may change them if we believe it’s in the best interests of investors.

Speak to a financial adviser to find out more.

You have lots of choice about how you access your retirement savings. We’re here to help. Our website, Your Retirement Planner, has information and tools to help you understand your options when you get close to retirement.