DIY investors risk missing out on up to £247,000 by switching out of the default options on their workplace scheme, according to new research from The People’s Pension and State Street Global Advisors.
The research highlights the potential dangers of investors making their own fund choice, potentially leaving them with investment strategies that don’t have adequate diversification or risk control.
This research is contained in the report ‘Workplace Defaults: Better Member, published by the two organisations.
The People’s Pension points out that as a result of auto-enrolment — and its 10m new pension savers — billions of pounds are now saved into workplace pensions each year. The vast majority are invested into well-managed and cost-effective default funds, where they are exposed to a wide range of investment types and markets.
The report identifies the potential cost of four of the most common mistakes made by pension savers who choose to be their own investment manager rather than investing in a default fund.
It shows how different savers, who display particular behavioural biases, perform over 33 years, compared to someone who stays invested in a well-run default fund throughout and amasses a pot of nearly £430,000.
The four example case studies highlighted are:
- Cautious Connor – Doesn’t like taking risks so invests in a cash fund – could miss out on nearly £247,000.
- Performance Chasing Patricia – Buys high into a strongly performing fund expecting it to continue to do well, but sells out again when it subsequently falls and she loses faith – could miss out on just over £173,000.
- Eggs in One Basket Elliot – fails to diversify his portfolio, for example, investing only in UK shares – could miss out on just under £31,000.
- Forgetful Fiona – Is initially an active investor but fails to keep her portfolio under review and circumstances change. This means she doesn’t ‘lifecycle’ switch to lower risk funds when approaching retirement – could miss out on nearly £31,000.
The report also focuses on the lack of knowledge around charges paid on pension accounts, with almost eight in 10 (78 per cent) savers unaware that a fee is taken from their pot. The research shows that, on average, ‘retail’ pensions carry a charge of one per cent, compared with a workplace average of 0.5 per cent.
The People’s Pension chief investment offices Nico Aspinall says: “Most people enrolled into a workplace pension stay invested in a default fund which, as this study confirms, is by far the simplest path to take to achieving good returns. There will undoubtedly be some who will want to take investment decisions and try to quickly make up the losses from this year’s fall in markets but this research shows that DIY investment is fraught with dangers.
“Members in the default fund typically face lower charges and every investment decision is made with their best interests at heart, improving their retirement outcomes.”
SSGA head of pensions and retirement strategy Alistair Byrne adds: “Investment decisions are complex and most busy pension savers can’t give them the time and attention they deserve. Investing in the default strategy means putting your future finances into well-governed and efficiently scaled products managed by experienced professionals.”