Savers have been warned about a “risky” pension investment strategy amid a steep rise in complaints.
The number of complaints concerning pension “lifestyling” nearly tripled last year, as the collapse in the value of bonds blew holes in savers’ retirement pots.
There were 176 complaints to the Financial Ombudsman Service in 2023 – up from 61 the previous year. There were just four complaints in 2021 and none in 2020 or 2019.
Lifestyling is the default investment strategy for defined contribution (DC) pension schemes where the risk profile of a pension pot changes the closer you get to retirement age.
Growth-focused stocks and equities are sold off in favour of traditionally lower-risk investments such as bonds.
Lifestyling pensions were designed for those who buy an annuity – which ensures a guaranteed income for life – as the vast majority of savers did before pension freedom rules were introduced in 2015.
However, government bonds – known as gilts – have performed poorly since the Bank of England raised interest rates 14 consecutive times between December 2021 and August 2023.
Most bonds pay a fixed interest rate, so when interest rates rise, they become less valuable.
It means many savers have seen tens of thousands of pounds wiped off the value of their retirement pots. Those approaching their target retirement date saw the value of their assets fall most steeply.
In her Budget last month, Chancellor Rachel Reeves’ dragged private pensions into the inheritance tax net from April 2027. Annuities will also be subject to the 40pc levy.
But pensions experts said the Chancellor’s move will change savers’ retirement strategies, encouraging them to spend their pension pot earlier, rather than leaving it as the last funds they use. This, in turn, will increase the popularity of annuities.
The pensions death tax raid also spares the public sector where defined benefit retirement deals – which cannot be inherited – are the norm.
Tom McPhail, of pensions consultancy, The Lang Cat, said: “Lifestyling has made a lot less sense post-pension freedoms because it’s harder to know in advance what you will do with your pension pot in your 60s.
“There are definitely problems with [lifestyling]. There are risks from keeping higher risk investments too long or not long enough and de-risking from your 50s.
“Inheritance tax on pensions is definitely a further complication in the equation – I think annuities are going to become more popular as a result.”
Rob Burgeman, of RBC Brewin Dolphin, said it was “unsurprising” that the number of lifestyling complaints had risen steeply.
