Savers who are close to retirement are piling into default pension funds which are failing to take on enough risk, according to Seven Investment Management.
The discretionary fund manager published a report yesterday (22 May) that challenges the assumptions of so-called ‘lifestyling’ pension funds, which gradually switch from equities to bonds as the investor nears retirement.
7IM estimated that more than £100bn in pension savings are invested in default funds, which risk leaving millions of people with no money towards the end of their lives.
Chris Darbyshire, chief investment officer at 7IM, said investors should not underestimate the power of compounding, adding: “By reducing investment risk at the point when you are at your wealthiest you reduce its enormous potential benefits.
“The world has changed; with a huge number of default pension funds automatically reducing risk as retirement approaches, many investors are sleepwalking into an uncertain retirement.”
7IM’s research compared two investors who each saved an average of around £7,500 a year from the age of 30 to 60.
One saver invested in a 'moderately cautious' portfolio targeting a return of 4 per cent a year, while the second saver took a step-up the risk ladder, investing in a ‘balanced’ portfolio targeting a return of 5 per cent a year.
The research found that if both savers had withdrawn £22,000 each year in retirement, then the first saver would have run out of money at 86, while the second investor still had around £275,000 left at this point and was still going strong at the age of 100.
Mr Darbyshire said this demonstrates how a very small increase in investment risk can make a remarkable difference to outcomes when pension pots are at their greatest, because the effects of compounding are at their most potent.
Justin Urquhart Stewart, co-founder of 7IM, urged the new government to mandate time on this issue.
Pete Matthew, chartered financial planner at Jacksons Wealth Management, said: “Automatic lifestyling just doesn't cut the mustard any more, and advisers need tools to be able to manage money and, more importantly, client expectations."
He said the financial planning process can offer the most value to a client during the transition from accumulation to decumulation.
“Planners and their clients need to factor in many variables to determine how long clients' money will last, and portfolios need to be managed more intelligently than ever.”
katherine.denham@ft.com
