What exactly is a lifestyle fund?

A lifestyle fund is like a ready-made investment package that automatically adjusts to according to your age and when you want to retire. What  this means is that as you approach your chosen retirement age your money  automatically  moved out of shares and higher risk investments, into what would normally be seen as a low risk investment such as Gilts (government bonds). Some funds could be up to 75% invested in Gilts following the switching. 

Lifestyle funds were popular in the late 1990s and early 2000s, and many companies offered them such as Legal & General, Aegon, Scottish Widows and Aviva. The intention of these funds was to protect the investor from market drops and changes drops in annuity rates. 

So what's gone wrong with lifestyle funds?

Some pension funds have been making the switch into Gilts for many years now for some pension holders. 

This has not been a problem when interest rates have been low, as existing Gilts become more valuable when interest rates go down. 

But as we all know interest rates have gone up in the past two years, so this means that funds that invest in long term Gilts have gone down. 

The chart shows the past five years and how the FTSE 100 has gone up and the Gilt Pension Sector has dropped. It has dropped around 22% or so (although some individual funds have dropped by more than 22%).

The problem for many people is that they find themselves with 75% of their fund in Gilts which have dropped by more than 30%, and with just a few years until retirement.  

As you can see in the chart, in May 2020 a lifestyle fund could have been selling shares at their lowest point to invest in Gilts at their highest point. This could be and probably has been disastrous for many investors, especially those close to retirement. 

Solutions for lifestyle fund holders

If you have funds in a pension lifestyle fund, and are wondering what you can do, then there are a number of options. What’s right for you will depend of your circumstances. Briefly they are:

  1. Do nothing and wait. The argument for this is that interests may have peaked, and that they could start to drop. If this happens then Gilt funds should start to increase in value. 
  2. If you are close to retiring you could accept the value and start to take benefits and buy an annuity or enter drawdown. Annuity rates are quite high now because of higher interest rates. 
  3. Switch to a different fund. This is something you could probably do with your current provider. You would simply ask them to take your money out of the lifestyle fund and invest it into a different fund, one which you would hope would grow and not fall in value. This may be quite risky, especially if you only have five years or less to go until retirement.  
  4.  Use an alternative investment, such as a fixed term annuity which is a guaranteed pension investment (see below for more details).  
Please note this is not personal advice. If you want personal advice we can offer this as we are UK based Independent Financial Advisers. Contact us for more details.

Fixed term annuities

A fixed term annuity could be the perfect solution (and they’re not actually annuities). Here’s an overview of how they could work to help recover losses from a lifestyle fund:

  • You invest your money for a fixed term, which you decide. The minimum is three years.
  • You know at the beginning how much you will get at the end of the term (provided you don’t cash it in early). 
  • There is no investment risk. 
  • They are fully covered by the FSCS for 100% of the investment.
  • No explicit charges. 
  • Fixed term annuities can be bought from UK regulated insurance companies.

Here’s and example.
Mr Hurst is 62, and he had funds in 2020 in a lifestyle fund worth £200,000 in a personal pension. In 2023 this fund has dropped to £162,000.  He plans to retire at age 67, and doesn’t want to risk his money in the stock market or hope that the Gilt element recovers. 
He decides to invest in a fixed term annuity. This will:

  • Be for a fixed term of 5 years – taking him to age 67 when his state pension starts.
  • Have £162,000 invested. 
  • Be 100% guaranteed at the beginning.
  • With a UK life insurer.
  • In this example – his loved ones are guaranteed the money back if he dies. 
  • Guaranteed at maturity in five years to provide £200,644. 

The example above is based on the rate as at the 5/11/2023 with Liverpool Victoria (LV) and their “PRP” plan. This can sit inside another pension with LV with “uncrystallised funds” – (where no tax-free cash has been taken). Not all providers offer this option.


When the plan matures he has access to the £200,644 fund value. He can then take his lump sum of normally up to 25% of the fund, and then withdraw taxable income or buy an annuity. 

As you can see Mr Hurst has made back these losses, without any investment risk. Inflation will have reduced its buying power, but he has just over £200,000 and he has got this back without investment risk. But he has made around £38,000 in profit, the equivalent of £7,600 per year – guaranteed. 

There are three UK providers in this market and their policies offer different benefits and features. Although once in the contract your return is guaranteed, but their current market rates can fluctuate. The companies currently offering these types of contract are:


At Pensions and Annuities Ltd we have been dealing in the fixed term annuities for many years, and can help you find out if it is right for you, and which provider is right for you too. For more information contact us today to discuss with an adviser.

If you want to discuss your pension, want advice, have a question, or just want to have a chat about it with a UK Qualified Independent Financial Adviser, then  phone now on 01793 686393 or contact us online. 

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