By Dale Critchley, Policy Manager, Aviva
While investing in the default fund might be the right thing to do if people don’t have the time or expertise to manage their own investments, it relies on people setting the retirement age that’s right for them.
We estimate that an average earner in an automatic enrolment scheme could lose over £4000 by sticking with a default retirement age that’s 3 years too early compared to their plans and just under £10,000 if they have a retirement age set at 60, but don’t actually intend retiring until age 68. With default investments providing solutions to over 12.5 million UK savers in master trusts alone this adds up to a substantial sum across UK pension savers.
Almost every default investment solution has a de-risking element. This means that as members get closer to their retirement date, investments are switched from higher risk (higher return) funds, to lower risk (lower return) funds, to protect their retirement savings from sudden market moves. While defaults might be heavily invested in high risk investments (e.g. equities) in the early years, this proportion falls to an average of 21% equities when people reach retirement age.
De-risking profiles have been carefully designed to balance risk and return in the approach to retirement. But this balance is thrown out of kilter if the retirement age on our records doesn’t match the member’s plans.
If we have a retirement age that’s too young we’ll move investments to less risky assets too early. This means members lose out on investment growth when their pension pot is the largest.
If we hold a retirement age that’s too old, we’ll keep money invested in riskier investments for too long. If investments lose value too close to planned retirement age there may not be time for them to recover their value. This means less money, or perhaps a last-minute delay to retirement plans.
The difference in return can be wide. An analysis of defaults found 5 year default investment returns to be 3.62% lower at retirement than at 30 years to pension age. And 2.4% lower compared to the average investment return at 5 years to retirement age.
Most schemes still have a default retirement age of 65 or younger, but anyone who’s aged over 41 won’t receive their state pension until age 68. Some will see the state pension as insignificant, but many will depend on it to provide them with the additional income to allow them to leave work. People might already have some kind of plan in mind - but they need to log onto their provider’s website and update their pension records if they’re to avoid a nasty surprise, or suffer an avoidable loss on their route to retirement.
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