Are lifestyle funds still fit for purpose?

Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.

Senior couple looking at financial documents
(Image credit: Getty Images)

For many years, lifestyle funds were a popular option with savers in stakeholder, personal and many defined-contribution workplace pension plans. The funds invest your money relatively aggressively while you’re younger, channelling your contributions into equities with the aim of building as large a pension fund as possible. Then, five to ten years before you’re due to retire, your provider automatically begins to switch your money into assets conventionally considered less risky: bonds and gilts, in particular. When you finish work, your fund will be almost entirely invested in these assets. 

The principle of a lifestyle fund is that savers closing in on retirement should not be exposed to the risk of a sudden drop in the value of their fund since they won’t have time to make up the shortfall. Bonds, which have traditionally offered much less volatile returns than other asset classes, therefore appear to be a good option. 

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David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.