How to spot if your workplace pension is underperforming – and unlock thousands for your retirement
Over 20m UK adults are currently contributing to a workplace pension, and for many of them, it’s the main component of their retirement plans.
As such, the growth rate that their workplace pension achieves can have a material impact on their financial security in their later years.
For example, if someone contributed £250 (including tax relief) to a pension every month for 45 years, a 5 per cent growth rate would see their pot grow to just under £495,000. A 4 per cent growth rate would see their pot grow to under £373,000 – nearly 25 per cent less due to the power of compounding.
These figures are concerning, but what’s more concerning is that many Brits don’t know what growth rate their workplace pension is achieving, and whether it’s underperforming or not.
Here’s how to find out – and what you can do if it’s behind the curve.
Checking your pension performance
Assuming you have a defined contribution pension (the most common type in the UK), your pension provider must send you an annual pension statement. It tells you:
- The total contributions made into your pension
- The amount you’ve paid in fees
- The change in your pension value over the year
- The retirement income your pension is currently forecast to provide
If you don’t have a recent pension statement, you can ask your provider for one. Many providers also offer this information through your online account. Make sure to look at the growth your pension has achieved over several years, not just one.
Broadly speaking, investors who are many years from retirement hope to achieve average annual growth of 5-7 per cent. Pension performance benchmark analysis released by PensionBee reveals that, over the last five years, a pension saver thirty years from retirement will have seen annual growth of 7.72 per cent, on average.
Those close to retirement – who need to prioritise wealth preservation over growth – will usually aim for a lower growth rate.
PensionBee’s analysis shows that savers nearing retirement will have seen average annual growth of 5.27 per cent in the last five years.
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Why workplace pensions underperform
If your pension is underperforming, it’s most commonly because you’re investing in a fund that’s too low risk for your circumstances, likely because you haven’t chosen an alternative.
Pension providers typically offer several funds and allow members to select the one that’s right for them. There will be higher-risk options, lower-risk options, and balanced options. Investors many years from retirement should usually consider higher-risk options that have the best growth potential.
However, many people don’t make a selection, meaning they remain in their provider’s default option, which is usually the balanced fund. By design, these tend to achieve a lower growth rate than the higher-risk options.
For example, if you’re one of approximately 13m people who have a pension with Nest Pensions, you will have been invested in a Nest Retirement Date Fund when you joined, which aims to “beat any rises in costs of living over time, but also add an extra 3 per cent on top”.
This is at the lower end of the range most pension savers hope to achieve.
Nest also offers a Higher Risk Fund, which has a specified goal “to grow your fund more than the Nest Retirement Date Funds” – but you’ll only be invested in this if you actively choose it. According to Nest, over 99 per cent of members remain in the default fund.
What you can do
With many of the UK’s largest workplace pension providers – like Nest, The People’s Pension, Aviva and Aegon – you can easily switch out of the default fund to a higher-risk one, if you decide that’s appropriate for you.
Remember: it’s important to take enough risk while you’re young, but it’s just as important to reduce your risk as retirement approaches, so you’ll need to review your pension regularly across that time.
If your workplace pension doesn’t allow you to choose your fund, a second option would be to open a self-invested personal pension (SIPP).
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Don’t close your workplace pension: you’ll still need it if you want to benefit from your employer’s contributions as well as your own. However, you may be able to make periodic transfers from your workplace pension into the SIPP, where you’re free to make your own decisions about how to invest the money.
Check your workplace pension documentation to see if partial transfers are allowed, and check there’s no fee to make them.
If you’re not confident making your own decisions about how your pension is invested, you can seek advice first from a qualified and regulated pensions adviser. Look for one that charges a one-off fee for this advice, rather than an ongoing charge. Note that you may be able to access workplace pensions advice through your employer.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
