It is good to see some proper work being done on Value for Money
Written by Times Senior Money Reporter Megan Harwood-Baynes
Where your pension is invested could mean the difference between retiring as a millionaire or being left with less than a penny, new analysis shows.
The personal finance site Investing Insiders looked at the performance of almost 13,000 pension funds, creating league tables to show the best and worst performing across different risk profiles (high, medium and low).
It found that taking a “select and forget” approach to funds may not just mean a slightly smaller pot — it could leave it empty.
Pensions are usually invested in a wide range of assets, including lots of different funds, plus less risky options such as cash. Investing Insiders looked at two scenarios where hypothetical investors invested all their money in one fund.
Person A saved £50,000 in the best-performing fund (Aviva Ninety One Global Gold Pension) in December 2020 and over the next five years got a 180.28 per cent return on their investment, increasing their pot to £140,140.
Person B saved their £50,000 in the worst-performing fund (Zurich JPM Emerging Europe Equity), which lost 98.59 per cent in five years, leaving £705 in their pot.
If that same trajectory continued over the next two decades, Person A would have a pension pot worth more than £3 million. Person B would be left with a fraction of a penny. These calculations include fund fees, but not investment platform charges.
Both funds are categorised as high risk, so would be offered to people with the same appetite for volatility.
Clare West from Investing Insiders said: “Sustained for 20 years, those kinds of returns are capable of producing either multi-million growth at one end of the spectrum, or near total wipeout at the other end.”
It also shows that you need to monitor where your money is invested in case something has gone badly wrong at one of your funds — as it did at many of the worst performers.
Zurich UK said its Emerging Europe Equity fund is self-selected by savers or through their financial adviser, and is not a default pension fund. It was suspended in February 2022 after sanctions were introduced following Russia’s invasion of Ukraine.
Zurich UK said: “The fund contains only the sanctioned assets and, as a result, shows very little value and low returns.”
Investing Insiders also looked at the returns on funds classed as medium-risk, where it had 20 years’ worth of data to analyse.
A saver who put £50,000 into the Zurich American Select fund in 2005 would have seen growth of 855 per cent, leaving them with a pot of £477,525. But the same amount placed in the Clerical Medical UK Equity fund would be worth £92,835, which returned 85.67 per cent during the same time.
Donato Boccardi, the head of investments at Aviva, said:
“By their very nature, default investment strategies are designed to do the heavy lifting for you, placing investment decisions in the hands of experts. But while defaults are essential, making small active changes to your pension — particularly increasing contribution levels — can have a significant impact.”
The problem with default schemes
While the risk of leaving your money in just one fund is clear, a select and forget approach can also lead to lower returns on a well-diversified workplace scheme.
The Financial Conduct Authority, the City regulator, has raised concerns that millions are being auto-enrolled into workplace pension schemes that don’t match their needs. In January it said it wants pension schemes to publish transparent data on their performance, costs and service quality.
Lily Megson-Harvey from the advice firm My Pension Expert said:
“Not every workplace pension grows at the same rate. While that may be concerning for some savers, it also highlights the importance of staying engaged with your retirement savings.”
Workplace pensions often utilise an automated strategy, called “lifestyling”, which matches risk to your age. In your younger years the scheme is “ambitious”, which allocates most of your money to equities, to generate maximum growth and benefit from the many years of compounding interest ahead, because you have time to weather any short-term volatility in the stock market.
As you approach your target retirement age, the scheme starts to take less risk, shifting your capital away from volatile stocks and into more stable assets, such as bonds, gilts and cash. This is designed to protect the gains made in earlier years and ensure a sudden crash right before you retire doesn’t wipe out a big chunk of your life savings.
But millions of workers may find themselves in a one-size-fits-all default scheme that is too cautious for them, especially if they are young and have decades until retirement. Being too cautious too early can leave a huge dent in their eventual retirement pot.
averages to see how it measures up. It’s also important to track down old workplace pensions and check if consolidating them makes sense, so you aren’t paying multiple sets of fees.
Most workplace pension schemes offer a range of investing options, so if you feel like it is a bad match for your personal risk appetite and retirement goals, you can move to something else.
“But this isn’t a decision to take on a whim,”
said Craig Rickman from the investment platform Interactive Investor.
“Do your research first and foremost, checking if your scheme has indeed stacked up unfavourably against its peers and/or its benchmark over a reasonable period, and making sure comparisons are on a like-for-like basis”
Crucially, just because a fund, region or sector is riding high now does not mean it will continue to do so. Investing is a long-term game, especially if you are trying to build enough wealth to live on in your later years.
“Constantly churning your long-term investments to chase the best-performing funds is not only a chore but can do more harm than good,”
Rickman said.
All graphs have been provided by Investing Insiders
