More than £100 billion is stashed in default pension funds that risk leaving millions of savers without the money they need to pay for a comfortable retirement.
The warning comes hot on the heels of similar warnings from SIPP platform Hargreaves Lansdown.
Now fund manager 7iM, which looks after around £11 billion for customers, argues that pension fund lifestyling is the wrong strategy for many retirement savers.
Lifestyling means switching money from risky equities to safer cash and bonds as savers approach retirement.
Shifting cash to these default, safe funds can strip pensions of thousands of pounds of growth.
Power of compounding
Chris Darbyshire, the fund’s chief investment officer explained investors should remember the power of compound interest.
“By reducing investment risk at the point when you are at your wealthiest you reduce its enormous potential benefits,” he said.
“The world has changed; with a huge number of default pension funds automatically reducing risk as retirement approaches, many investors are sleepwalking into an uncertain retirement.”
7iM compared the investment returns of two investors with similar savings. One adopted cautious lifestyling approach while the other accepted a slightly high risk.
Both saved an average £7,500 a year between the ages of 30 and 60 years old.
The cautious investor accepted a 4% a year return, while the other sought a 5% a year yield.
Different outcomes
The analysis showed if each took £22,000 a year from their pensions, the cautious saver would run out of cash by the age of 86.
The other investor still had a fund of £275,000, which would last until they reached around 100 years old.
“The case study shows how a small increase in investment risk can lead to remarkably different outcomes when pension pots are at their greatest, because the effects of compounding are at their most potent,” said Darbyshire.
“I think the industry has continued with this way of thinking because it got into a groove and found a business model that works.
“And once you have a business model that works that thing is a proverbial ‘super tanker’ that cannot be moved off course.”
