Active investment into pension funds yields 4.9% higher returns
For most people, they have little say in how or where their work pension is invested. But new research has shown that a lack of engagement in this area could lead to 4.9 per cent lower returns in the long run.
Workers who are saving into a workplace pension but who have no involvement with selecting their own investment funds have their pay automatically placed into "default" funds. These funds are not allowed to charge more than 0.75 per cent each year.
Those who make their own investment decisions have a larger array of funds at their fingertips and can pick and choose between some of the most expensive options, ones that charge above 0.75 per cent, but that often perform much better.
Hargreaves Landsdown, the United Kingdom's largest broker, conducted in-depth analysis over over 80,000 savers and found that, overall, the workers who self-selected their investments had an annual retirement income that was 4.9 per cent higher than the average default pension fund.
The average saving fund for these self-selectors was around £30,000, compared to just £3,790 for someone who inactively invests through defaults. This disparity does not come from the increase in annual returns alone, but suggests that investors become more engaged with the investing process as their savings grow, and possibly branch out into other forms.
The figures were calculated by comparing the return from the ten most popular funds, as chosen by Hargreaves Lansdown, with the median return from the default funds offered by six of the largest pension firms.
The 10 self-selected funds returned a total of 14.8 per cent annually (after fees), as compared to a 9.9 per cent return for the default funds.
Although these increases seem relatively small, it's important to remember that when it comes to investments even tiny increases can have a significant effect on the eventual size of a portfolio. For this reason, long-term and consistent investing is often seen as a safer and more sustainably rewarding alternative to higher-risk short term investments.
The percentage of annual returns you receive should not, therefore, be overlooked; as they really have the potential to tip the balance when it comes to your savings pot.
Talking about the standard practice of paying into default funds, Hargreaves' Nathan Long warned that they were designed to be "conservatively managed" , with an intentional lack of exposure to the ever-fluctuating stock market, and for this reason they may "not suit everyone".
"Most people will be investing in a pension for over 40 years. Such long time periods lend themselves to investing in riskier investments, as any fluctuations in value can easily be ridden out," he said.
So, where to start? Well, over 70 per cent of those who chose their own funds picked from the broker's "Wealth 150" list, with 'best buys' featuring firms such as CF Woodford Income Focus and Lindsell Train Global Equity.