All workplace pension schemes will have a default investment fund that new members, who have not actively engaged in the pension process, will contribute their and their employer’s premiums to. The problem with a default fund is it is trying to be suitable for all, so in reality, it is likely to be truly suitable for no-one. Legislation makes the default fund cheap to invest in and hold, but investment for the long term is more than just a question of raw cost; actual fund performance and the possibility of losses are also important.
A recent survey by Hargreaves Lansdown suggests that default funds will underperform other common alternatives by roughly 5%, but the sampling methodology is open to some criticism and the most significant statement is from Hargreaves Lansdown’s senior pension analyst Nathan Long saying “Our research shows that those actively engaging with their pension options are achieving better returns.”
Most default funds are designed to be conservative and defensive, with a limited exposure to equity funds, (that ought to provide long term growth), and a larger exposure to gilts and corporate bonds, (which should provide stability and security of value). If you are 30+ years to retirement, significant equity exposure will be expected to make a huge difference to your eventual retirement. Conversely, if you are retiring next month and using an annuity, any investment risk is possibly unacceptable, as if the market falls your annuity income could be much lower.
All members of pension schemes need to consider a few basic truths:
Not engaging in the pension process will cost you dearly in 30+ years’ time. Compound interest is the biggest driver to fund values, so save early, save often!
The default fund is very unlikely to be appropriate for you; if you are young, you probably should be taking more risk; if you are older you need to consider annuity or drawdown and invest accordingly. One size fits all in these circumstances is likely to be a poor decision.
It’s highly unlikely you are paying enough into your pension. 8% in total pension premiums is nowhere near enough for half pay at age 67. Think around double that from age 20 to retirement and even more if you delay!
Investments need to be reviewed regularly. At age 20, every year is perhaps too often. At age 50, every 5 years is not enough.
Overall, pensions are the most tax advantaged way of saving for retirement; make sure you take advantage early enough to make your chances of retiring on a solid pension income more likely down the line.
Arrange a Meeting with one of our IFAs.
If you think your pension would benefit from a review, the first step is to contact us at email@example.com or call us on 01223 792 196 to arrange an introductory meeting with one of our expert pension advisers, at no cost to yourself.
About Martin-Redman Partners
We are a team of experienced Independent Financial Advisers (IFAs) who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.
We offer expert independent financial advice throughout Cambridgeshire, Leicestershire, Suffolk, East Anglia and the South East. Many of our clients are within, or are in the surrounding areas of Cambridge, Grantham, Stamford, Bury St Edmunds, Frinton on Sea, Ely, Peterborough, Huntingdon, Cambourne, Newmarket, Soham and Oundle.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.