In which investment fund is your work place pension invested?
Not sure? Well then the answer probably is the default one. Well done for getting those contributions in there but that is only half the picture.
You see it is not enough for you and your employer to just pay the money in and trust everything will be ok, you also need to make sure the contributions get invested properly.
If you are in the default fund, you are not alone, 90-95% of occupational pension monies are. But how can the same fund be as good for an 18 year old starting their career as a 64 year old about to hang up their boots? The answer is, it can’t. Age isn’t the only driver either, there are a whole number of reasons as to why your pension should be invested differently to your colleague’s or even your spouse’s.
This massive lack of engagement in our pensions has led to the big life companies default funds swelling to enormous sizes. This presents challenges to the fund manager as well as you. The default fund’s beneficial owners are effectively sleepwalking their pension towards retirement regardless of whether the investment mix is a good fit for their plans or not.
The good news is that there is almost always an alternative. If you ask your employer, they will be able to provide you with a whole host of alternative funds from which to choose. We would favour low cost funds with indexing at the core, but the primary objective should be to choose one or a selection of them where the allocation between growth assets (stocks and shares) versus defensive assets (bonds and cash) reflects your plan and investment horizon. Those with a very long horizon before they retire who have significant defensive positions in their portfolio, effectively have the brakes on.
Some funds attempt to address this problem by automatically moving from more risky growth assets to defensive assets within the fund as a selected retirement age approaches (sometimes called a lifestyle fund). There are a whole host of reasons why this might not be right for you.
Even worse, the Government funded Nest scheme has younger investors in low risk assets early on, because they are worried that they might opt out when they see the short term volatility in the value of their small pots caused by stock market fluctuations. What a patronising approach! If young people are susceptible to destructive behaviour towards their finances, surely it is better to educate them rather than compromise the returns they are so desperately going to need?
It is good to see The Pensions Regulator taking a look under the bonnet of the default funds, even so, the best solution is to take control yourself or with the help of an adviser. With an understanding of the core principles of successful investing, a far better outcome can be achieved by picking a selection of the other funds available which better match your objectives. By doing so you are far more likely to achieve higher returns, grow a bigger retirement pot and who knows, maybe even retire earlier. Assuming that is your plan of course…...