A pension is something many of us sign up for and then forget about, but failing to get to grips with where your retirement savings are invested could prove an expensive mistake.
If your money hasn’t been working as hard as it possibly can for you, your pension pot might not end up quite as big as you’d hoped.
Despite this risk, nearly three out of four of us (74%) have no idea where our pension is invested, according to research by investment service Hargreaves Lansdown. This also often means we don’t know how much our pension pots are worth, or when we might be able to afford to retire.
Nathan Long, senior analyst at Hargreaves Lansdown said: “Only a quarter of people know how their pension is invested. Those that know about their investments are more likely to have their retirement ducks in a row. They’re twice as likely to know the current value of their pensions, what options they have available to them at retirement, and how much they’ll need to retire on.”
Default funds explained
Unless you’ve specified that you want your retirement savings to be invested in a particular fund or funds, most pension savers have their contributions automatically invested into a one-size-fits all ‘default fund’.
The default fund is typically what’s known as a ‘lifestyle fund’ which will automatically change as you approach retirement. When you’re a long way off retirement, for example, your money will go into a fund invested in a broad mix of investments, but predominantly shares, with the aim of growing your pension pot.
As you start to approach retirement, so usually when you’re in your mid to late forties or early fifties, your savings will gradually be moved into less risky investments, such gilts (which are government bonds) and cash. This is to reduce the risk of your pension suddenly plummeting in value just before you retire, which might happen if there was a sudden stock market crash and all your money was in shares.
Why the default fund may not be the best option
With many of us working for longer and opting to leave our pension savings invested in retirement so we can take an income from them via drawdown, moving into low risk investments relatively early on might not be the best option. This is because over long-term periods, shares tend to perform better than cash and gilts.
For example, according to research by online investment service Interactive Investor, based on the latest Barclays Equity Gilt Study, which measures returns from shares, gilts and cash, the average real return over the past 10 years is 5.8% for UK shares, 2.7% for gilts and -2.5% for cash savers. The real return is the return you get after inflation, or the cost of living, has been taken into account.
Using these figures, if you’d chosen a pension default fund which gradually rebalanced your investments and reduced your exposure to shares by 10% each year, putting 6% of that into gilts and 4% into cash, you’d have generated a return of just over 40% over the 10 year period – turning £100,000 into £140,493. However, if you’d left it invested fully in shares, your pension pot would be worth £35,000 more at £175,734.
However, it’s important to remember that this hasn’t been the case in every decade, and indeed there have been periods when a lower risk approach would have reaped higher rewards.
That said, over an average 10 -year period, shares have outperformed cash 91% of the time, although of course past performance shouldn’t be relied on as a guide to what will happen in future.
Choosing the right fund for you
If you’re intending to invest throughout your retirement, using drawdown to take an income from your pension as and when you need it, you might be comfortable taking on more risk, as your investment horizon will be longer.
If, however, you’re planning to use your pension to buy an annuity, or income for life, when you stop work, you may prefer to stick with the default fund, or another lower risk option. This can provide you with peace of mind that the value of your savings won’t suddenly fall just before you need them.
Ask your pension provider which funds you can invest in. They should provide you with information about all the options available to you. You can find more detailed information in each fund’s Key Investor Information Document (KIID). These are usually available online, or your pension provider should be able to give you a copy). The KIID explains the fund’s investment objectives, charges and other information.
You’ll usually be able to choose from cautious, balanced or more adventurous options, so you can find a fund which matches your appetite for risk. Remember to take charges into account too, as the higher they are, the more they’ll eat into your investment returns. You can find out more about choosing pension investment funds from the Pensions Advisory Service.
If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
Have you moved out of or are considering transferring away from your pension provider’s default fund? If so, we’d love to hear from you. You can get in touch via [email protected] or post on the Rest Less Community forum, a place where you can get tips and support from like-minded people.
Some important information about Rest Less Money
We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.
When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.
Key things to remember when using Rest Less Money:
We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.
No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.
Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.
A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested.