Savers picking funds in AE are better off, research shows

Hannah Godfrey writes

Active fund choosers are on track for bigger pension pots than those who remain in the auto-enrolment default fund, research from Hargreaves Lansdown has found.

The investment house found the average performance of the top 10 funds picked by savers outperformed default funds by 4.7% over one year, 5.58% per year over three years, and 4.86% per year over five years.

Hargreaves conducted research into the fund choices made in more than 300 auto-enrolment schemes, covering almost 80,000 members.

It said the outperformance can be attributed to the increased risk that the choosers tend to take on, as default funds tend to be lower risk in their makeup in an attempt to cater to all.

It said it can also be attributed to active management, which all the top 10 chosen funds benefited from.

The research showed a small increase in returns over a 40-year working life can make a sizeable difference: someone earning £28,000 and making contributions of 10% can expect a pension pot of £447,000 when achieving a 6% return, as opposed to £347,000 on a 5% return.

It did not consider the affect an adviser has on a client’s pension pot.

The pension provider said being a chooser does not mean adopting a hugely complex strategy, rather it was about selecting a handful of quality funds and then reviewing them on an on-going basis once or twice a year.

Typical chooser

The typical chooser has an average age of 40, Hargreaves found. Men are more likely to become choosers, with 25% making investment choices compared to 15% of women.

Choosers are most likely to reside in the South East of England and least likely to live in the North West. They have an average pot size of £29,996 compared with £3,790 for defaulters.

A typical length of membership is 3.5 years for choosers compared with 2.75 for defaulters.

Hargreaves Lansdown senior pension analyst Nathan Long said taking the time to understand where a pension is invested was “time well spent.

“A great starting point when trying to improve the returns from your pension investments is to understand where your workplace pension is currently invested. The stockmarket has historically given the largest returns over time, but it also tends to suffer the biggest falls in times of adversity,” he said.

“Most people will be investing in a pension for over 40 years. Such long time periods lend themselves to investing in riskier investments as any fluctuations in value can easily be ridden out.”