The hidden pensions danger wiping millions from retirement pots
Charlotte Gifford
8 min read
mouse trap on a pile of cash illustration for pension trap
Have you been caught out by lifestyle investments? Contact money@telegraph.co.uk
Millions of pensions are still at risk of haemorrhaging money close to when savers need them most, a Telegraph Money investigation has found.
Savers have been repeatedly warned that bond market chaos could wreck their retirements if their pension has been automatically moved to “unsuitable” lifestyle investments by their provider.
And as turmoil returned to the bond markets this week – inflicting more pain on the pensions of workers approaching retirement – Telegraph Money can reveal:
A typical pension saver could be £90,000 worse off if their investments are moved out of the stock market and into bonds.
A former pensions minister said it was “astonishing” that companies had failed to act.
One 59-year-old reader lost a third of his £330,000 retirement pot because their pension had been supposedly “de-risked”.
Adam Daniels, 59, has held senior roles at various firms in the City of London over his career. He had been carefully squirrelling away as much as he could into his pension for years, encouraged by his employer’s generous contributions.
But despite all his diligent saving, a third of one of his retirement pots was wiped out in the blink of an eye.
This was due to the bond market chaos in September 2022 following the “mini-Budget”.
The leap in interest rates and fall in bond prices – which began in 2021 and continues today under Labour – spelled disaster for many savers in their 50s and 60s on the brink of retirement who had invested in their workplace pension’s “default” fund.
These default funds often use the strategy called lifestyling, where your savings are slowly shifted from exposure to the stock markets to bonds, as these are perceived to be lower risk.
But recent volatility has turned this logic on its head – and savers like Mr Daniels are the ones paying the price. He has lost £100,000 from a pot originally worth £330,000.
He said: “I’m lucky and this hasn’t changed my retirement plan, but I’ll never be able to save that [money] again and I have lost the compounding interest effect. For some people, the sums lost will be life-changing.”
Mr Daniels feels so burnt by the experience that he has decided to move his pensions into a self-invested personal pension (Sipp) where he will manage the investments himself. He thinks the financial services industry should have done more to stop workers from losing their life savings.
“They got away with it scot-free. The mini-Budget doesn’t mean every organisation has an excuse to say, ‘the market went crazy, there’s nothing we can do’. The job of a pension company is, at the very least, not to lose savers’ money.
“Anyone over the age of 35 should have realised these low interest rates couldn’t last forever and should have had a plan for when they started moving to protect savers.
“Pension administrators and trustees need to be more cognisant of what’s going on in the market and not just blindly follow their strategies and destroy their members’ pension pots.”
A gilt is effectively an “IOU” issued by the Government, paying a fixed interest rate. As the official Bank Rate falls, the bonds already in issue become more attractive, while their prices decline if interest rates rise. When prices fall, yields go up.
A long period of ultra-low interest rates meant bonds were stable for several decades, but rising interest rates driven by higher inflation in 2022 and 2023 led to falling bond prices, with devastating effects for lifestyle funds. Many savers were left sitting on heavy losses with some forced to delay retirement.
This week there were fears we could see a repeat of 2022’s retirement chaos as borrowing costs hit their highest levels since the financial crisis.
Government bold yields have risen around the world in response to fears of higher inflation, stoked in part by Donald Trump’s tariff plans.
However, Laith Khalaf, of stockbroker AJ Bell, said gilt prices were unlikely to fall as dramatically as they did in 2022.
“We’re very, very unlikely to see such deeply negative returns given yields are starting from a much higher level, and bonds are also now paying some income, which can offset capital losses.”
That said, the average gilt fund is down 2.5pc in the past three months while the typical lifestyle fund is down 4.4pc as a result of the latest bond market sell-off.
Getting ‘lifestyling’ right
Rob Morgan, of wealth manager Charles Stanley, said workers approaching retirement are those hardest hit by falling bond prices. “This will inevitably impact the value of these funds, although the extent will depend on where the fund is on its glidepath – it will affect those close to retirement age more.”
One problem with lifestyle pensions is that they can be targeting the wrong retirement date as people work longer. If you are in a default fund, then your retirement age will be automatically set unless you change it. This means workers’ pensions can start systematically moving out of the stock market much sooner than they expect.
Lifestyle funds usually start to “de-risk” five to 10 years before your retirement date. But taking money out of the stock market too soon can mean savers miss out on higher returns.
Lifestyling was designed in an era when most savers bought an annuity at retirement age. Shifting assets towards bonds acted as a hedge against annuity rates moving suddenly, some savers had some kind of certainty of what level of income they could expect.
But following the introduction of the pension freedom reforms in 2015, most savers now choose to leave their pension in “drawdown” accounts instead, taking a tax-free lump sum and keeping the rest of their pot invested.
Sales of annuities fell from over 450,000 per year in 2009 to 72,000 in 2023, according to data from the Pensions Policy Institute (PPI). This means that those in old-fashioned lifestyle funds left their savings exposed to shifts in the bond market.
According to estimates by Charles Stanley, a saver whose pot was worth £150,000 five years ago would have over £210,000 today if 80pc of their pension was still invested in shares. But had the assets shifted into bonds, their pot would be reduced to about £120,000 – a difference of £90,000.
For years experts across the pension industry warned that lifestyling was no longer appropriate. In 2019, the PPI wrote that “many defined contribution schemes” still employed the strategy even though it “may be unsuitable for defined contribution pension savers who wish to continue investing their savings”.
Former pensions minister Baroness Ros Altmann said it was “astonishing” that so little had changed despite repeated warnings.
She said: “It has been a massive disappointment to me that pension companies have simply failed to rise to the challenge of developing new products.”
What next?
Some have blamed regulators for failing to intervene and steer pension schemes away from lifestyling in the wake of the 2015 reforms.
The Policy Exchange, together with Columbia Threadneedle Investments, said in a recent report: “Existing regulatory priorities have forced schemes to adopt overly defensive asset allocations for older savers known as ‘lifestyling’ that has led to poor performance, particularly for savers close to retirement.”
They urged the Pension Regulator to review lifestyling and consider new retirement income products that deliver better results for savers.
Default investment strategies have evolved over the past decade, according to the Pension Policy Institute, but thousands of people are still losing out every year.
The Financial Conduct Authority and the Government hope that improved engagement with pensions could lead to better retirement outcomes. A joint review is trying to give providers more powers to help savers avoid these pitfalls.
But can savers be blamed for trusting that a pension company’s default fund would be the safest option for them?
One Telegraph Money reader, a 74-year-old business owner who wished to remain anonymous, said he had lost about £20,000 of his £90,000 pot because of lifestyling. He did not know his pension had been moved into bonds. “People like myself are not really aware of which funds are the best – so you trust the pension companies.”
He has been forced to continue working and is hoping to save enough to recoup some of the money lost.
The Pensions Regulator said it has published guidance on how trustees should communicate with savers to support retirement outcomes and that is actively engaging with the Department for Work and Pensions (DWP) as it develops new requirements for trustees to offer retirement solutions that are tailored to meet members’ needs.
A government spokesman said: “Pension scheme trustees have a duty to act in the best interests of their members, and the Government requires them to provide information about the investments chosen on their behalf.
“There should be no doubt of this Government’s commitment to economic stability and sound public finances. We are meeting our fiscal rules – both the stability and investment rules are met two years early, and from this point we are only borrowing for investment and net financial debt falls.”
