Savers must pay more attention to where their pensions are invested as default fund returns can vary from 3 to 12 per cent, according to research.
According to research from the Tax Incentivised Savings Association (Tisa), published yesterday (June 3), 95 per cent of members of defined contribution schemes are invested in the scheme’s default fund which can vary hugely when it comes to performance.
The research found that over the last three years, 20 of the largest pension providers' default funds delivered returns ranging from 3.4 per cent to 11.9 per cent, which has an impact on the value of savers’ pension pots.
For example, Tisa found that if an individual on a £30,000 salary invested in a pension fund with an annual growth rate of 3.4 per cent, their fund would be valued at £153,600 after 50 years.
Comparatively, if someone on the same salary invested in a pension scheme with an 11.9 per cent annual growth rate, their fund would be valued at £2,271,200 over the same time period.
Savers cannot choose their default funds but they can be asked to have their pension invested in a different fund.
Renny Biggins, retirement policy manager at Tisa, said: "When it comes to choosing a pension scheme for employees, employers and financial advisers often focus on cost rather than other factors such as potential fund performance.
"Whilst a more sophisticated fund design doesn’t guarantee higher returns, the possible returns based on up to date modelling techniques should be factored into the decision making process to increase the likelihood of enhanced retirement outcomes for employees.
"Even a marginally better performing fund can make a huge difference to someone’s retirement savings, and it doesn’t have to come at a significantly greater cost."
Due to this, Tisa has called for savers to take a greater interest in the impact that investment performance has on the fund value over the longer-term and the discrepancy that exists between default funds to build a larger pension pot for the future.
William Burrows, retirement director at Better Retirement, said: "It is vitality important that people take an interest in where their pensions are invested. This is often easier said than done but there is a lot at stake.
"There are a lot of behavioural reasons why people are not good at managing their own investments; for instance, there is a tendency to be over confident when markets are rising but panic when markets fall.
"However, choosing the right investment strategy is important and this is normally best achieved by having an adviser who will recommend a risk rated and well-diversified portfolio in line with the investor's long term objectives.
"An increasing number of people are choosing to self-select but most people are simply not equipped to make complex investment decisions."
Last month financial information firm Defaqto disclosed the default fund performance of 24 pension providers across a one to five-year period, collecting data up to December 31, 2018.
It found that over a three-year period the best performing default fund was provided by SuperTrust UK, showing annualised returns of 11.9 per cent. This compared with the worst performer, NOW: Pensions, which achieved a 5.6 per cent return, a difference of 6 percentage points.
SuperTrust UK was also the best performer when comparing five-year returns, at 10 per cent compared with Standard Life's 3.9 per cent, which was the worst performer, according to Defaqto.
amy.austin@ft.com
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