You might not be interested or feel comfortable in choosing where your retirement savings are invested. If this is the case, then it is likely you have the money in your pension invested into the provider’s default pension fund.
We are never going to criticise providers for making it easier for people to invest their retirement savings. This should be a much better idea than leaving money in cash.
However, could they be improved upon? Are they offering value for money? Most importantly, do they give investors the best chance of maximising their retirement savings?
What might a default fund look like?
A default pension tends is usually what we call a “multi-asset fund”. These funds invest money into lots of other funds and spread money across the areas of the market.
An example would be how a lower-risk multi-asset fund might have a lot more in investments like government and corporate bonds than a higher risk one. A higher risk multi-asset fund might be invested more into shares of companies (equities).
How have they done?
The latest Betafolio Multi-Asset Fund Report looks at 94 investment companies. In total it covers 420 funds which account for £189.47 billion of savers money.
The report ranked each fund. It also compared them to a simple portfolio that essentially copies the wider market. Such a portfolio would require little management and would cost very little.
A lot of these funds sell themselves to savers with the promise of being to outperform the wider market. Interestingly the report found no multi-asset funds beat the simple portfolio without taking more risk.
Did it find anything else?
One thing the report looked at was another selling point for these funds, their ability to reduce the impact of market falls. During the ‘Covid Crash’ of 2020 where stock markets fell significantly, there appeared to be no special protection offered by these funds.
Investment cost was a key factor in the overall performance. Funds with higher costs usually did worse. The report noted that the median total cost was 1.16% per year and the highest cost was 3.9% per year!
What can I do?
If you have chosen a default pension fund you are probably not getting the best returns for your money. An alternative option is selecting the funds yourself. But if you don’t have the time, willingness or ability to do this you may do more harm than good.
As well as focusing on ensuring our clients get the best financial planning, we also run our own investment portfolios. The costs involved usually come in well below the total cost of many of the multi-asset funds. We would deliver more value also as we offer financial planning in addition to investment management.