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.”

What is a default fund?

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, usually when you’re in your mid to late forties or early fifties, your savings will gradually be moved into less risky investments, such as 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.

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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.

How to choose the right pension 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.

If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.

The consultation is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

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