Why 50 is the most important age in your pension journey

There’s a point in the pension journey at which important decisions need to be made - but hardly anyone realises it.

For years, the pensions industry has encouraged people to engage with their pension earlier in life. It has modernised default investment strategies and encouraged people to increase their contributions and consider consolidating old pots, with mixed success.

All of those areas are important, but there is another stage in the pension journey that deserves much more attention, and that is when somebody reaches their 50s.

This is the point at which people should be making one of the biggest investment decisions of their lives, but most of them don't even realise it.

The default investment option of most workplace pension schemes automatically reduces investment risk as people approach their selected retirement age. This process, often referred to as lifestyling or de-risking, gradually moves investments away from riskier growth assets into investments that are expected to be less volatile.

The logic makes sense, after spending decades building a pension pot, nobody wants a significant market fall just before they retire.

Examining the default strategies

Retirement has changed dramatically over the last 20 years, but many of the assumptions behind default investment strategies have not evolved at the same pace.

These strategies were originally designed when buying an annuity was assumed to be the main way people would take an income in retirement, meaning a last-minute market fall could permanently reduce that income.

Although today's default strategies have adapted to reflect the growth of drawdown, they are still based on broad assumptions. With people now retiring in so many different ways, it is almost impossible for one default strategy to meet everyone's needs.

Overall, more people now use drawdown than buy an annuity. Many people also like the idea that, if they don't spend their entire pension pot during retirement, whatever remains can be passed on to their loved ones.

It is now common for people to phase their retirement, continue working beyond their original retirement age or leave much of their pension invested long after they first start drawing benefits. Despite these very different retirement journeys, most people are still following the same generic default investment strategy.

Avoiding unnecessary risk

The introduction of automatic enrolment, with its default strategies, has been a major success and has helped millions of people save for retirement who may never have invested otherwise.

Pension providers have a difficult job, they need to design investment strategies that are suitable for millions, offer good value for money, maintain strong governance and avoid exposing people to unnecessary risk. Personalising investment strategies for every individual is the answer, but that would involve providing advice which is simply impractical.

As pension pots become larger and retirement has become more flexible, the limitations of a one-size-fits-all approach have become much more apparent.

As an example: Three people in the same workplace pension scheme could reach the age of 50 with completely different retirement expectations. One may hope to retire at 60, another at 70, while a third may plan to reduce their working hours at 60 but leave most of their pension invested for many years. Yet all three could find themselves following exactly the same de-risking strategy.

Many people have collected several pension pots throughout their working life. One pension may already be de-risking while another remains invested for growth. Individually, each arrangement may seem sensible, but when viewed together the overall investment strategy may not be ideal for what the individual is actually trying to achieve.

Critical milestone

This is why I believe age 50 is such an important milestone. It provides a natural opportunity to step back and review the bigger picture. By this stage it becomes much easier to visualise how you want to retire, how you intend to use your pension and whether you have other investments that should be considered alongside it.

Only then can you properly assess whether your current investment strategy supports the retirement you actually want.

For some people, continuing to de-risk will be absolutely the right decision, for many it won't. The point here is not whether de-risking is right or wrong, but that the decision should be a conscious one, rather than something that simply happens in the background because the default strategy says it should.

As automatic enrolment continues to mature, more people are reaching their fifties with substantial pension pots. As an industry, we've spent years encouraging people to ask themselves whether they're saving enough for retirement. That is still an important conversation, but maybe we should also be asking another question now: "Is my pension invested in the right way for the retirement I actually want?"

For most people, that conversation should probably start around the age of 50.