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Pension Lifestyling – A Blessing or a Curse For Retirees? Blog 241

12th February 2024

Paddy Delaney

Lifestyling on €1m Pension Pot

Pension Lifestyling in Ireland is rampant.

By my reckoning, the vast majority of people with pensions are invested in insurance company pension schemes using ‘Pension Lifestyling’. This week I explore if that is a prudent approach for you as a pension holder on the cusp of retirement, or a useless sales tool that you should avoid like the plague.

Lifestyle Pension Strategy – 101

Pension lifestyling in Ireland involves the insurance company fund management designing an investment approach where your pension funds gradually shift from higher-growth (and volatility) assets to lower-growth (and volatility) ones as you approach a proposed retirement age.

Typically, this involves your scheme automatically reallocating investments away from equities and towards bonds and cash funds. The stated aim is to protect your accumulated pension pot from market volatility, and supposedly deliver a stable income stream for you. This strategy is ultimately designed to try balance risk and reward based on your retirement timeline. We wrote about LifeStyling in-depth here in Blog 53 many moons ago!

To pick just 3 of the largest Defined Contribution schemes in Ireland, here is their high-level approach to Lifestyling your pension pot;

Irish Life’s Empower Lifestyling method will begin moving you into a ‘Stability Fund’ once you are 11 years out from retirement.

New Ireland’s IRIS method will start moving you into defensive assets from 15 years out from retirement.

Mercer Aspire, from what I see, will start moving you to a Stability Fund from 20 years out from retirement.

If however, you chose not to go with the Lifestyling option, your pot will remain invested as you have requested on day 1, until such time as you tell them otherwise.

The Blessings of Pension Lifestyling in Ireland

This is intended to be a balanced piece, so what are the benefits of using a Lifestyle strategy on your pension?

We can all see that there is an emotional need being satisfied if we have Lifestyling on our pension pot – we feel that if markets fall as we approach retirement ‘we won’t lose half our pension’! This basic need of security is addressed simply by being a member of the Lifestyling strategy. Whether it is actually being met is another matter – we feel a sense of security, thinking that our pot won’t get obliterated by market movements.

Lets imagine that you were retiring in Summer of 2020. You had accumulated €1m in your occupational pension scheme, and were satisfied when you looked at your pension statement in January. You intended to take the max tax free lump sum of €200k, which would leave €800k, which you intend to put into an ARF. This €800k would generate initially 4% per year, €32,000 gross income per year, which exactly what you needed.

You are invested in the Lifestyle strategy, so are not too concerned when Covid 19 pandemic happens, and global markets plummet quickly.

Were you invested in either Irish Life Stability Fund, Mercer Aspire Retire Fund, New Ireland Passive 2020 you would have seen a decline in that first Quarter 2020, but not a huge one; -5%, -7% and -6% respectively, as you’ll see below.

Were you instead invested in a Global Equity Index or an 80/20 portfolio (80% Equity and 20% Global Bond portfolio) you would have seen a 19% and 18% decline respectively.

So, the Lifestyling protected you somewhat (but not fully) from the declines in that particular scenario.

Is that a large enough blessing? Only you can answer that!

The Curse of Pension Lifestyling in Ireland

Lets run that same scenario forward a little shall we?

You were in the Lifestyling strategy, and due to Covid market fallout you say your €1m pension pot value go from €1m to c€940,000 in that first quarter. And to remind, you were not retiring until the summer of 2020. What did the various Lifestyle Strategies, and the Global Equity Fund and 80/20 portfolio do in the following Quarter?

For the first half of 2020:

Irish Life Stability Fund -2%

Mercer Aspire Retire -2.8%

New Ireland Passive IRIS 2020 -3.6%

80/20 Portfolio -5.7%

Vanguard Global Equity Fund -5.8%

So, not a lot in the difference here is there?

So you get to your retirement date end of June 2020 and you are in the LifeStyle strategy. You can take your €200k and still have very slightly less than your intended €800k of cash to go towards ARF.

And here is the real kicker!

Using LifeStyle Fund Options Via Your ARF – Multi-Decade outcomes

Were you to have run those ‘low risk’ funds straight from your DC Occupational Scheme into your ARF, here is how you would have faired since June 2020.

From the end of June 2020 to February 2024:

  • Irish Life Stability Fund +2% Total Return
  • Mercer Aspire Retire +10%
  • New Ireland Passive IRIS 2020 +10%
  • 80/20 Portfolio +47%
  • Vanguard Global Equity Fund +63%

If you had owned an ARF of c€1m at that point of retirement, and were drawing 4% per year you would have withdrawn c15% since July 2020. You would therefore now have less than €1m in your ARF had you used any of the ‘low risk’ funds, and you would have significantly more than €1m had you used a growth-oriented portfolio.

And conscious that this is a fairly narrow 4 year window in this scenario. So, here is the same comparison cast over the past 11 years (back to the start date of the LifeStyling products).

I’m not recommending that you invest an ARF in any of the above approaches, simply showing you actual outcomes of LifeStyle/Low-Risk versus multi-decade Growth-Focused investing.

If we take the New Ireland Aspire Retire Fund, it has delivered c3.8% annualised return. Inflation in that period (20%) alone has wiped-out almost half that gain. So when you deduct fees and your own withdrawals over that period of 11 years you are certainly not protecting your legacy much.

Conclusion – Pension Lifestyling in Ireland

I did not know what the numbers would state when I started this piece but I’m not surprised either. Lifestyling, from what we have seen in the above and other scenarios and timeframes, has not fully protected investors from declines, yet robbed them of 50-80% of the long term gains that all long term investors want and/or need.

If you want your ARF to generate sufficient returns to cover fees, inflation and potentially your own withdrawals, we can say with a high degree of confidence that a Lifestyling Strategy will not deliver what you want. But that is only if that is what you actually do want!

I hope this helps you or a loved-one.




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