Around four million workers under 40 could be losing out on investment returns as they are in low-risk pensions that do not have potential for higher growth.
Research, undertaken by Opinium, showed 66% of people between 18 and 39, equal to around 10 million people, have a low-risk (25 per cent) or medium-risk (41 per cent) pension, whilst 19 per cent have a high-risk pension. Furthermore, over half of workers under the age of 40 feel a medium-risk pension will produce the strongest returns for their pension, although evidence that higher risk portfolios with a greater proportion of exposure to equities are more likely to deliver higher growth over the long term.
A higher risk investment can be more beneficial for those in the younger age bracket. However, it has been shown that younger workers do not have a tendency for high risk pension investments. Majority were going for the medium risk and about a third were going for low risk. More men were going for a higher risk pension than women.
Industry experts warned that further education is needed, as the research also revealed that the average expected real annual return from a pension among workers under 40 is 4.6 per cent. This means that younger workers will have to increase their contributions or increase their risk level to boost their chances of retiring with a decent pension.
The danger is that people who put themselves in the ‘low risk tolerance’ category choose low risk pension investment mixes in the early days and miss out to the tune of tens of thousands of pounds further down the line.
Although there is no ‘free lunch’ as higher portfolios carry more risk, younger investors can afford to take this risk. All investment funds are not equal, a higher proportion of your fund held in stocks (or equities) gives a bigger boost to returns prospects over the long term, yet most young workers think that medium risk is the best option for higher returns. Young workers could pay a heavy price for it when they retire, in the form of lower retirement incomes.
Over their lifespan of pension investment the difference becomes large. Investing all of your money in equities an average earner would expect to have £46,000 more money at retirement compared to a balanced moderate risk fund. That is equivalent to increasing lifetime contributions from 8 per cent to 12 per cent or working a decade longer.
Every person should make sure that their pension is invested in the right way for them and their future needs.