When I asked to see my husband’s pension, he looked a little sheepish, like you would if you had a monthly bill that had been draining your account for years — a gym membership that you had never used, for example.
It was worse than that. “I’m not sure I even have a pension,” he admitted. Clearly, he does not engage with anything that his wife writes about.
Unless you have actively opted out or not had an employer for the past 12 years, then it is likely that you have a pension. It’s probably all there, with your contract, languishing away at the bottom of a drawer somewhere. People rarely interact with their pensions, thinking that they are a “set-it-and-forget-it” type of thing.
Except they’re not.
When we finally tracked my husband’s savings down, we found that he actually had three workplace pensions. One of them was a laggard. Over the past five years, it had returned just 3 per cent a year after charges. The average is closer to 6 per cent, and while this may not sound like a life-changing amount, it is.
Unless you are one of the few who take an active role in their pension savings and have personally chosen the fund you are invested in (yes, pensions aren’t just sitting in some dusty pot somewhere, they are invested), the likelihood is that your pension is still in your employer’s default fund. Default funds are designed to be low-cost and suitable for the average employee. But average is rarely optimal.
Our analysis of default funds found that almost 90 per cent were underperforming against a standard benchmark, and the difference between the best and worst funds was huge.
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Millions of people fail to check where their money is held, costing themselves thousands of pounds in retirement.
In my husband’s case, the best medium-risk fund had returned 49 per cent over five years, while the worst had lost 30 per cent. On a £300,000 pot, the difference is staggering: £447,000 in the best fund versus £210,000 in the worst after just five years. Over ten years, the gap grows to more than half a million pounds.
It’s easy to see how people can fall into this trap. Pensions aren’t known for their simplicity, and there is no obvious trigger for reviewing them. Millions are losing out on growth because they assume that a professional is making sure their pension fund is doing a good job.
Poor savings mean many risk a sharp drop in living standards when they retire
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I don’t just see this as an issue for retirement savers. Employers should also get a wake-up call when choosing pension funds for their employees. This needs to be more than just about ticking a compliance box. Many workers rely on their employer to make these decisions with their workplace pensions, and the results show that this isn’t a decision that should be taken lightly. A well-performing pension costs no more than a poorly performing one, but it can deliver vastly better outcomes.
The UK is on a slow march towards a pension crisis. Most savers are not on track for a comfortable retirement, even when you factor in the state pension. Auto-enrolment has brought millions more into saving, but minimum contribution rates of 8 per cent are simply not enough for most to secure the income they will need.
Combine low contributions with underperforming workplace funds, and you have a dangerous mix. Unless individuals and employers take more responsibility for checking the performance of their funds and increase savings where possible, we risk a future where large swathes of the population face a sharp drop in living standards the moment that they stop working.
In my husband’s case, we consolidated all three of his pensions into one fund that had historically been an outstanding performer over a significant period. Of course, there are no guarantees that the fund we chose will continue to outperform, but at least we’ve given it the best shot. And even tiny percentage point differences in performance can compound into a significant amount over decades.
Now all that’s left is to hope that Rachel Reeves doesn’t come for our pensions as she attempts to plug that big black hole in the nation’s finances.
Antonia Medlicott is the founder and managing director of the personal finance advice site Investing Insiders