What is a target date fund?

A target date fund is a type of pension fund that adjusts the mix of your investments in anticipation of your expected retirement date. It uses the ‘glidepath’ model of moving your money from riskier to safer investments in small increments over time. This approach aims to maximise your money’s growth opportunity while you’re younger, and aims to protect your money as you near retirement. PensionBee’s Tailored Plan is a target date fund.

Why choose a target date fund?

Target date funds have some advantages over other types of pension funds, primarily that they can be ‘set and forget’ by pension savers who can rest assured that their pension investments will be automatically managed in a way that is considered appropriate for their age at any given time in their life.

Target date fund advantages

  • Target date funds are an effective hands-off way of managing your money
  • The growth potential of your money will be maximised by investing in higher-risk assets, such as company shares, while there’s still time to make up for any short-term losses
  • The security of your money will be improved by investing in lower-risk assets as you approach retirement, helping to mitigate short-term losses that could affect your retirement income
  • Your money will have a good chance of outpacing inflation due to investing in assets with higher growth potential early on
  • If you plan on buying an annuity when you retire, a target date fund can help you manage the stability of your pension around the time you intend on making your purchase
  • You can switch from a target date fund at any time, should you wish

Target date fund disadvantages

  • Target date funds aren’t suitable for those who prefer to actively manage their investments themselves
  • Like all investments, there’s no guarantee that your money will grow substantially during the early years
  • Despite reducing the risk of losses during the years leading up to retirement, risks aren’t completely eliminated (as is the case with all financial investment products)

How do target date funds work?

Target date funds work by investing your money in higher-risk assets while you’re far away from retirement, and lower-risk assets while you’re nearing retirement. This is done very slowly to minimise the impact of any market fluctuations.

The mix of assets usually includes different types of investments, such as company shares, commodities, listed property, and bonds. This allows for more precise movement from higher-risk to lower-risk investments.

The reallocation of investments is usually overseen by a team of analysts who can monitor and respond to market conditions as needed.

Designed to protect investment growth

The main benefit of a target date fund is that it aims to protect (or ‘lock in’) your returns as you approach retirement, so that your money’s more insulated against any sudden economic downturns.

Here’s how a target date fund with twelve asset classes might invest in a mix of assets for a 25 year old and a 65 year old.

Notice how the 25 year old’s plan leans towards higher-risk assets (like company shares), while the 65 year old’s plan leans towards lower-risk assets (like bonds)?

By balancing the portfolio of investments this way:

  • the 25 year old (who’s still a long way from retirement) is more likely to see the value of their pension grow at a faster rate than the 65 year old
  • the 65 year old is less likely to see the value of their pension fall in value if the stock market were to crash

Assuming the 65 year old had been invested in the fund for a long time, they’d have already enjoyed the growth opportunity that the current 25 year old is experiencing, and is now protecting that growth by investing in more stable assets.

Retirement target stages

In practice, this shift towards lower-risk assets happens over many years (usually beginning 30 years before the anticipated retirement age).

The following chart shows how someone’s plan might change over time.

It’s important to bear in mind when the target date fund assumes you will retire. The PensionBee Tailored Plan has a target retirement age of 65 and UK State Pension age is 66, rising to 67 from 2028.

Lifestyling pension plans and their downsides

The glidepath model of gradual investment allocation is a more sophisticated approach than one of the most common alternatives, the ‘lifestyling’ model. The lifestyle model is similar to the glidepath model but uses a much smaller mix of assets (usually two to three).

It also reallocates its investments over time, but it does so only two or three times over the pension’s lifetime. This more rigid approach can lead to mistimed investment allocation - moving away from company shares while the market is up, for example.

For this reason, PensionBee doesn’t offer a lifestyling pension plan.

Consider PensionBee’s target date fund pension plan

Target date funds are usually available as workplace pensions. But PensionBee offers a target date fund as a personal pension, allowing you more flexibility when planning for your retirement.

Our Tailored Plan can help you get the most of your pension by focusing on growth while you’re younger and stability as you approach retirement.

The plan is managed by BlackRock, one of the largest money managers in the world, and experts in the underlying glidepath model since 1993.

As well as benefiting from this hands-off pension plan that changes with your age, you’ll be able to enjoy the following benefits:

  • Transfer your old pensions into one easy-to-manage plan
  • Easily manage your pension from the PensionBee app
  • Pay one simple annual fee
  • Speak to your personal BeeKeeper if you ever need help

View our pension plans.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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