Switching from pension default fund could cost ‘DIY’ investors up to GBP247,000

DIY investors risk missing out on up to GBP247,000 by switching from their workplace pension scheme’s default investment strategy and making their own fund choices instead, according to new research from The People’s Pension and State Street Global Advisors.

Largely due to the success of auto-enrolment and its more than 10 million new savers, billions of pounds are saved into individual UK workplace pension pots each year. The vast majority are invested into well-managed and cost-effective default funds and exposed to a wide range of investment types and markets in order to manage the risk for savers.

The new report, Workplace Defaults: Better Member Outcomes, has revealed the potential cost of four of the most common mistakes made by pension savers who choose to be their own investment manager rather than investing in a default fund.

It shows how different savers, who display particular behavioural biases, perform over 33 years, compared to someone who stays invested in a well-run default fund throughout and amasses a pot of nearly GBP430,0003:

Cautious Connor - Doesn’t like taking risks so invests in a cash fund - could miss out on nearly GBP247,000.

Performance Chasing Patricia - Buys high into a strongly performing fund expecting it to continue to do well, but sells out again when it subsequently falls and she loses faith - could miss out on just over GBP173,000.

Eggs in One Basket Elliot – fails to diversify his portfolio, for example, investing only in UK shares – could miss out on just under GBP31,000.

Forgetful Fiona – Is initially an active investor but fails to keep her portfolio under review and circumstances change. This means she doesn’t ‘lifecycle’ switch to lower risk funds when approaching retirement – could miss out on nearly GBP31,000.

The report also focuses on the lack of knowledge around charges paid on pension accounts, with almost eight in 10 (78 per cent) savers unaware that a fee is taken from their pot.4 The research shows that, on average, ‘retail’ pensions carry a charge of one per cent, compared with a workplace average of 0.5 per cent.

Nico Aspinall, Chief Investment Officer at The People's Pension, says: “Most people enrolled into a workplace pension stay invested in a default fund which, as this study confirms, is by far the simplest path to take to achieving good returns. There will undoubtedly be some who will want to take investment decisions and try to quickly make up the losses from this year’s fall in markets but this research shows that DIY investment is fraught with dangers.

"Members in the default fund typically face lower charges and every investment decision is made with their best interests at heart, to help improve their retirement outcomes."

Alistair Byrne, head of pensions and retirement strategy at State Street Global Advisors, adds: “Investment decisions are complex and most busy pension savers can’t give them the time and attention they deserve. Investing in the default strategy means putting your future finances into well-governed and efficiently scaled products managed by experienced professionals.”