Investments  

Savers confused by the role of risk in pensions

Savers confused by the role of risk in pensions

A mere third of savers are aware that taking some risk is necessary to make a pension grow, in a sign there is widespread confusion about the topic.

According to Hargreaves Lansdown, which polled 2,000 individuals, there is a lot of misunderstanding in this area, with one in five believing taking risk with their pension means they could lose it all.

The survey also showed that a quarter of savers think taking risk with their pension means they are gambling, while one in ten believe investments are risky and the best option is sticking to cash.

The Financial Conduct Authority has previously warned of the dangers of focusing on cash, as it found last June that around 50,000 (33 per cent) non-advised drawdown consumers were wholly holding cash, with more than half at risk of losing out on significant returns as a result.

Nathan Long, senior analyst at Hargreaves Lansdown, said savers should take some time to understand where their money is invested.

He said: “Nobody relishes the opportunity to dust off their old pension statements and dig into the details, but while it’s unlikely to be the most exciting hour of your life, it could be the most lucrative.

“After your house, your pension is likely to be your biggest asset when you get to retirement, so it deserves some time and attention at least once a year.”

He added: “Taking on a bit more risk by investing more in shares and less in cash and bonds can give your pension a boost in the long term.

“Your pension provider should have some helpful information, or a financial adviser can help steer you in the right direction.”

Alan Chan, director and chartered financial planner at IFS Wealth & Pensions, said: "I find this astonishing but it does reflect my own experience with some new clients. It goes to show that there are many individuals who lack basic understanding to investing and the risks of inflation.

"I’ve come across a number of individuals who do not realise that their pensions need to take risk to grow and being told this for the first time in their lives is a scary thought for them as they tend to associate risk with gambling.  

"However, this is a big myth and there are different degrees of risk. It’s important for people to understand that cash is not risk free and, unless they are about to retire and buy an annuity, it will be a bad choice for their pension because it will inevitably be eroded by inflation and charges over time."

maria.espadinha@ft.com

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