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Investment: risk and reward

Default option and life-styling

A default investment strategy is an investment option that is used in PRSAs and most defined contribution schemes if you do not exercise your own right to choose how your fund is invested. Life-styling is an approach commonly used in defined contribution schemes and is often chosen as the default option. Life-styling is an investment approach where contributions for each member are invested more heavily in higher risk growth investments, such as equities and property at younger ages and then gradually switched automatically to lower risk investments, such as bonds and cash as the member nears retirement.

The idea behind life-styling is that when members are younger it is assumed that they can afford to take greater risk in expectation of greater returns. As members approach retirement it is assumed that this appetite for risk reduces and it is more appropriate for a member’s investment to be linked to annuity costs, which are more closely aligned to bonds.

But life-styling may not be every member’s chosen option, for example, if you are planning on transferring your retirement funds to Approved Retirement Funds and continuing to invest in growth assets after retirement.

You should carefully review the information provided on your options before making any decisions.