Lifestyle funds are a seductive solution to the demands of building and maintaining a retirement fund. The funds supposedly do all the thinking, moving into lower-risk assets as an investor nears retirement. However, there is a danger that high exposure to gilts could leave investors at this time of life vulnerable if the climate of low interest rates and quantitative easing starts to shift.
'Lifestyling' has become a popular option for defined-contribution pension schemes and is often the default option for scheme members. These funds often take a conventional asset allocation route, with younger investors largely exposed to equities, with older investors largely invested in developed-market government bonds - usually gilts.
To date, these funds have often worked well to compensate investors for lower annuity rates. Annuities are priced from the rates available on long-term gilts. As quantitative easing and low interest rates have suppressed gilt yields, annuity rates have fallen. At retirement, lifestyle funds are loaded up with 'low-risk' developed-market government bonds and investors have benefited from their rising capital values.