Is your work pension right for you…?

Making the right investment decision within your pension will make a significant difference to how much you have in the future, what that pension fund can help you enjoy in the future and how secure and comfortable your financial future might be.

Whether you are nearing the time you can draw from your pension or if you are at the start of your pension saving journey, or somewhere in between, it is never too late or too early to make sure your investment is right for you.

Many savers only have pensions that have been set up by their employers (a workplace pension) and those pensions have default investment options. These investment options have been selected by employers and pension trustees and the concept is to provide investment solutions for those employees not equipped to make their own investment decision.

New clients often tell me that one of their work pensions has performed better than another and they attribute this to the pension provider (the pension wrapper) and haven’t considered comparing the investments in the pension.  Many haven’t realised they have a choice of investments for their work pensions. Knowing this is really important, because it is usually the investments that account for the difference in performance and not the pension wrapper.

While default investments serve a purpose, it is important to understand that they might not be right for many investors.

Investment choice

Default pension investments are limited in number. Having limited options aren’t necessarily a bad thing, but these investments are typically designed to cater to a broad range of employees, by age, risk appetite, and retirement goals. However, this one-size-fits-all approach may not align with an individual's specific time horizon, risk profile and future pension needs The default investment options may not optimize the retirement savings for all employees.

Level of risk

Default pension investments often adopt a conservative investment strategy to balance risk and cater to a broad group of employees. Pension trustees are aware that this may be the only retirement savings that some employees will have. While this conservatism may be suitable for some individuals with lower risk tolerance, it may not be the best approach for everyone.  Being too risk adverse will limit the true potential of this savings pot.

Life-styling

Some default solutions have a ‘life-styling’ investment approach built in. This allows the pension provider to change the investments and ‘de-risk’ them over time, as the employee nears retirement. This is usually done by reducing equities and increasing fixed income investments. This can and might appear attractive at first glance because the investment strategy evolves with the investor over time. However, the reality is that this isn’t personal and doesn’t take into consideration an investors other assets, holistic tax and investment planning and the risk of inflation. This can increase the risk that savings don’t keep pace with inflation and savers outlive their investments.

Lack of personalisation

As previously explained the default investments are designed to be generic and cannot cater to individual circumstances or preferences. By defaulting to a pre-selected option, individuals miss out on the opportunity to personalize their investments based on their own ethical considerations or specific investment preferences. Personalization is required to align the investments with an individual's values.

 Take control of your pension

While default pension investments provide a convenient option for individuals who do not want to actively make investment choices, they aren’t right for everyone. The one-size fits all approach is one that can limit a saver’s future pension value.

To make the most of work pensions, individuals should take an interest in understanding the available options, seek professional advice if needed, and consider other investments that align with their specific risk appetite, values and retirement planning.

Many work pension schemes can’t facilitate adviser charging so some advisers are reluctant to take on the risk of providing that advice and therefore don’t advise on them. This isn’t the case with advisers being paid a fixed fee from clients, and making investment recommendations on work pensions should be part of holistic financial planning.

By taking control of pension investments, individuals can work more confidently towards securing their financial future.