Should you invest outside your ‘default’ pension fund for better returns?

Standard retirement funds are designed to suit the average worker who is automatically enrolled in a work plan, and the vast majority of savers remain in them until retirement.

Such funds tend to be safe investments because employers don’t want to be blamed for costly mistakes that jeopardize their staff’s retirement savings.

Most are trackers, passively tracking the performance of one or a selection of the world’s stock markets and are cheap to own, although some are actively managed to some degree.

But occupational retirement plans provide a ‘walled garden’ of other funds, aimed at those who want more actively managed, adventurous, niche or ethical investments, or a combination of the above.

Some retirement experts recommend sticking with your standard fund, especially if you have no investing knowledge, and about 90-95 percent tend to do this whether it suits them or not.

But others point out that more adventurous funds, especially those with greater exposure to equity markets, have historically generated much higher returns over the long term.

We take a look at how to determine whether it’s worth keeping your retirement savings within the default fund and what to consider if you’re looking to move your money around to hopefully get a better return.

Should you stick with a standard fund?

Standard retirement funds are offered by all providers of defined contribution plans and are generally suitable for most people, says Fidelity International’s head of workplace distribution Dan Smith.

“It’s worth remembering that standard strategies are designed for those who don’t have the time or experience to manage their own retirement,” he says.

“So if this is you, you might want to start by getting to know your default fund before going down the road of self-selection.”

He adds that they are diversified in terms of assets, with most also including sustainable — or ethical — investments.

Martin Ansell, pensions expert at NFU Mutual, says: ‘Standard funds will suit many employees, and it’s important not to act hastily after a year of poor performance, as pensions are long-term investments.

‘However, a different fund may be more suitable depending on your individual circumstances.

For example, a 48-year-old planning to retire at 50 would need a different mix of bonds and stocks than a 48-year-old planning to retire at 65, or a 48-year-old using his pension as shelter. for inheritance tax.’

David Gibb, financial planner at Quilter, says: ‘Knowing how your workplace pension is invested is very important, but as people are automatically enrolled in a company pension, they often need to save for the scheme’s default fund.

While this is certainly better than having no savings at all, taking this approach is unlikely to give you the best possible return on your investment.

“Performance can vary significantly between different investments. Even a small difference can significantly increase the size of your pension pot in the longer term.’

What you should pay attention to when saving outside the standard fund

Employees can get a better retirement in retirement by diversifying their investments within the other funds offered in defined contribution work plans. Here are six questions to ask yourself when deciding if and how to do this.

1. What other funds are available?

“Choosing your own investments in retirement means having a strategy in place that’s tailored to when you plan to retire,” says Fidelity’s Dan Smith.

“Your plan needs to be monitored and adjusted to keep you on track, so you should set aside time each year to review your investments to make sure they meet your needs.”

Diversification is important when choosing your own funds, but this is more than just choosing multiple funds. You have to understand which investment categories, countries and companies are in those funds.’

Smith says you need to think about whether the underlying investments will give you the diversification you need and how they will help you achieve your goals.

You can search for funds on your scheme’s website, but you should look beyond that as well. A good place to start is This is Money’s Fund Center, but Morningstar and Trustnet also contain a lot of detailed information about funds, who manages them and how they performed.

It’s also worth taking a look at This is Money’s jargon buster AZ guide to the often cryptic names given to funds.

2. How much risk are you willing to take?

Your risk appetite is an important consideration and should be based on how soon you plan to retire, says Smith.

“If you’re more than 15 years away from retirement, you may be more accustomed to risk, while in 10 or five years you’ll want a less risky strategy with more access to cash.”

See more below about “lifestyling,” the jargon for reducing investment risk before retirement.

3. What are the costs of other funds in your scheme?

The fee limit for a standard fund is 0.75 percent and the fees for selecting other available funds may well be higher.

However, they will still generally be cheaper than if you buy the same fund yourself outside of a pension because workplace providers can negotiate bulk discounts.

The government is exploring whether the standard fund ceiling could be relaxed in the future to allow for investment in high-risk, high-reward business ventures and green projects, which typically carry higher performance fees.

When comparing fund fees, the most important figure to check is “ongoing charges,” which is the standard measure of the ongoing charges of funds in the investment industry. The larger it is, the more expensive the management of the fund.

Quilter’s David Gibb says: ‘Standard funds have a load limit and choosing an alternative can result in higher fund costs – although this isn’t necessarily a bad thing if you can get better performance.’

4. How much or completely do you want to reduce risk before you retire?

When the retirement freedoms were introduced in 2015, most people started holding their pension funds in pension funds throughout their old age rather than buying an annuity.

If you plan to stay invested, you may want to avoid de-risking your fund over the last 10 years or so before retirement, or what is known as “lifestyled,” into safer and less risky government and corporate bonds and cash.

That was the norm before you used your entire fund to buy an annuity, which gives guaranteed income until you die.

But if you expect to remain invested for the next 30 years, with the goal of achieving decent growth over that time, it’s probably better to stick with most or all of the stock market investments as you approach retirement age.

Unfortunately, the recent bond crash and volatile stock markets have left many people in default pension funds with lifestyles that are incurring huge losses.

We look at how to limit losses if you have a big hole in your pension fund here, and if you are still saving in the lead up to retirement, whether you need to ‘lifestyle’ your retirement here or take any risks.

Gibb says, “Standard funds are ‘lifestyled’, which means that the risk level of your investments automatically decreases as you get older.

‘Moving to a non-lifestyle fund means that the risk does not decrease and therefore you are responsible for reviewing the level of risk throughout your life, especially as you get older and near retirement.

“If you do remain invested in a lifestyle fund, it’s important to consider whether it has a collection, annuity or withdrawal focus and decide what’s best for your circumstances.

‘Also check what the assumed retirement age is and whether it fits in with your plans. If not, it is essential that you change it, otherwise the level of risk may not be appropriate when you retire.”

5. Would you like to learn more about ethical investing?

“Sustainability is a hot topic right now and everyone has an opinion,” said Fidelity’s Dan Smith. “When choosing your own investment strategy, you should consider aligning the investments you choose with your own beliefs.

‘More and more data is available to show investors what impact funds have on the environment.’

Fidelity Personal Investing has an ESG fund tool called the Seeker for sustainable investing that helps investors search for those who achieve their sustainability, social action, risk and potential return goals.

Read a This is Money guide to ethical investing here.

6. Should You Consult a Financial Adviser?

“Wherever possible, you should seek professional financial advice to ensure you make the best possible decisions for your personal circumstances and retirement plans,” says Gibb.

“Financial advisors have access to tools that allow them to do broader and more in-depth research and comparisons than you could on your own.”

He says it’s especially important to seek advice if you’re just starting out in investing, as you may not be comfortable with market volatility and as a result choose a low-risk fund.

“This would be wrong when it comes to long-term retirement savings, especially if you’re a long way from retirement and don’t have access to retirement,” he notes.

In this case, staying in a standard lifestyle fund would be a better option because they aim for the right level of risk based on your age, which could give you better performance than if you chose an option with a low risk.’

Martin Ansell of NFU Mututal says if you want to explore changing funds, a financial advisor can help you explore your reasons, the risks involved and the possible alternative funds in your arrangement that may be appropriate.