An estimated four million younger workers could be losing out on investment returns because they are in low risk pensions that do not have potential for higher growth.
Research, conducted by Interactive Investor, and backed by findings from LCP, found two thirds of workers aged between 18 and 39 had they have either opted for a low risk (25 per cent) or medium risk (41 per cent) option with their pension. Only 19 per cent say their pension is high risk.
This equates to almost four million workers nationally.
Meanwhile the survey found more than half (54 per cent) of workers under 40 think a medium risk pension will product the strongest returns and best retirement outcome, despite evidence that a higher risk portfolio, with more exposure to equities, is likely to deliver superior growth over the longer term.
This research found the risk profile of younger workers’ pension investments appears to reflect their risk appetite rather than how many years to retirement they have left, with only 16 per cent of younger workers describing their risk appetite as “high”. In contrast 41 per cent described it as “medium” and 33 per cent said their risk appetite was “low”.
A recent report: ‘Is 12% the new 8%?’, from LCP and Interactive Investor revealed the impact that ‘lower for longer’ investment growth from global stock markets could have on the defined contribution workplace pension pots of today’s younger workers.
The report suggested younger workers would either have to increase their contributions or take other actions, such as increasing the risk level of their pension, to boost their chances of retiring with a decent retirement pot.
LCP partner and head of investment Dan Mikulskis says: “All investment funds are not equal, a higher proportion of your fund held in stocks (or equities) gives a bigger boost to returns prospects over the long term, yet most young workers think that medium risk is the best option for higher returns.
“This is a failure of communication and young workers could pay a heavy price for it when they retire, in the form of lower retirement incomes.
“Over decades, the difference becomes very large. For example by investing all of your money in equities an average earner would expect to have £46,000 more money at retirement compared to a balanced moderate risk fund. That is equivalent to increasing lifetime contributions from 8 per cent to 12 per cent or working a decade longer.”
Corporate Adviser’s Master Trust and GPP report shows that there is a significant disparity in the equity component of many workplace default funds.
Becky O’Connor, head of pensions and savings, interactive investor, said: “It’s high time for some serious education around risk and growth in pensions for workers under 40, because at the moment, millions of people who are young enough to take some risk with their investment in return for higher growth are not doing so.
“High risk in this context doesn’t mean crypto trading – it just means a higher proportion of equities. The danger is that people who put themselves in the ‘low risk tolerance’ category choose low risk pension investment mixes in the early days and miss out to the tune of tens of thousands of pounds down the line.”