Analysis of the latest Financial Lives Survey from the Financial Conduct Authority (FCA) has revealed a pressing need for improvement across the four core pillars of Defined Contribution (DC) pension saving: contribution rates, investment performance, fees and length of saving.
The data mining from leading independent financial services consultancy Broadstone demonstrates that without greater engagement and understanding, thousands of UK workers could unknowingly drift towards an income shortfall in retirement, it says.
Pillar 1: Contribution rates
A successful retirement strategy relies on adequate contributions – but awareness is low. Two in five savers (38%) are unsure how much they’re contributing to their pension, while four in 10 (41%) have not thought about how much they should be contributing. Almost half (49%) have never checked the value of their pension pot. One of the simplest and most effective ways to boost pension savings is to increase contributions — even by just a small proportion of salary. Over time, this small adjustment can significantly enhance your retirement savings due to compounding, particularly when combined with tax relief and employer contributions.
Pillar 2: Investment performance
While contributing sufficiently is key, it is important that pension savers are also getting the best possible performance from the pension to maximise their savings. But three in 10 savers (30%) did not realise their pension is invested at all, and an even larger group – almost seven in ten (69%) – are unaware of where those investments are held. Most savers stay in their scheme’s default investment fund — but this may not reflect the provider’s performance or their risk appetite, time to retirement or income goals.
Pillar 3: Fees
Not all pension funds are created equal when it comes to fees, and high charges can significantly erode returns over the long term.
Ongoing engagement enables savers to monitor charges and optimise returns. However, nearly six in ten (57%) are unaware that fees are being deducted from their pension pot. Choosing lower-fee funds (like passive or index trackers) means more money stays invested. A reduction from 0.75% to 053% in fees may not sound like much, but over decades it can translate to thousands more in a pension pot.
Pillar 4: Length of savings
The length of time people save into their pension for is critical to the size of the nest egg they are able to build up over time. However, around one in seven (14%) of savers do not know when they expect to begin drawing an income from their pension suggesting a lack of clarity over how long people need to save for.
David Brooks, Head of Policy at Broadstone, said: “The four pillars of retirement saving are crucial for those with DC pensions to build financial security in later life. It is worrying, if not surprising, that there appears to be a low level of understanding across these areas which suggests we are heading towards a looming retirement adequacy crisis. The findings suggest that for many pension savers, not opting out of their workplace pension could represent a job well done. However, understanding of the importance of contributions, investment performance and fees could make a huge difference to their standard of living when they ultimately reach retirement.
“Government policy is certainly aiming to make life easier for members by creating fewer, larger schemes that will hopefully reduce fees and create more consistency in performance. The next phase of the Government’s Pension Review will focus on adequacy and increasing contributions will be a key focus of that investigation. However, understanding the impact of increased contributions on the broader outcomes for low- and medium-income workers need to be understood. The Government could also do more to ensure those who can save more into their pension but are not currently doing so are the priority group in terms of improving outcomes for the largest group of people possible. A key fact that pension savers will increasingly need to understand is their quality of life in retirement will be based on how much they can afford to save now and for how long they can save for or continue working.”
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