Millions of UK pension savers approaching retirement age are putting their cash into default funds – reducing their investment risk but putting themselves in peril of running out of cash – according to a new report.
The paper, published by Seven Investment Management (7IM), highlights that more than £100bn in savings has been invested in so-called ‘lifestyling’ pension funds – which gradually switch from equities to bonds as the saver nears their retirement date.
The company warned that those that shirk risk in such a way face the possibility of running out of cash later in life, and urged the government to make the issue a “national conversation.”
Chris Darbyshire, chief investment officer at 7IM and co-author of the report, said: “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.
“We are not saying reducing risk isn’t right for some people, but this is a conversation that needs to be happening. Investors should not underestimate the power of compounding.
“By reducing investment risk at the point when you are at your wealthiest you reduce its enormous potential benefits.”
Pension investments – the expert view
Matthew Yeats, quantitative investment manager for 7IM added: “The research suggests that in the vast majority of circumstances investors would be better off leaving more of their portfolios in equities at and into retirement than they have done traditionally.
“We aren’t saying investors should take more investment risk than they are comfortable with, but they need to understand that by choosing lower-risk investment options they may be increasing the danger of running out of money in retirement – and they certainly shouldn’t do it automatically without thinking the issue through.”
Scottish Widows head of fund proposition, Iain McGowan, explained that the company has updated its default investment approach to reflect that more customers are expected to stay invested in retirement:
“Lifestyling programmes have traditionally switched away from equities on the assumption that the investor will buy an annuity at retirement.
“Since pension freedoms, that is no longer the norm and some equity exposure is appropriate to maintain long term returns.
“Scottish Widows has changed its default path to one that retains some equity investment to offer potential growth at an appropriate level of risk.”