Research suggests that millions of workers are being too cautious with their pensions. Taking too little investment risk with retirement savings could mean your pension is much lower than it could have been. It could affect your retirement lifestyle.

Pensions and investment risk

If you pay into a defined contribution (DC) pension, your money will usually be invested. This includes your own contributions, employer contributions, and tax relief. By investing your money, you’re giving it a chance to grow over your working life.

All investments come with some level of risk, and values can rise as well as fall. Your pension provider will usually offer several investment funds for you to choose from, with varying levels of risk. Knowing how much risk you should take can be difficult, but research suggests many pension savers are being too cautious.

According to IFA Magazine, an estimated 4 million workers under 40 are in low-risk pensions. When asked how much risk they thought was appropriate, 39% of under-40s said the most appropriate level of risk for their pension was “medium”. Some 28% said they think “low-risk” investments are appropriate. This compares to just 20% that said “high”.

When assessing the appropriate level of risk for your pension, your age matters.

This is because young workers are still investing with a long-term time frame in mind. When you’re investing for the long term, you have a longer period for investment volatility to smooth out. When you’re 40, you could still have several decades before you’ll start accessing your pension. Taking a higher amount of risk with your pension when you’re younger has the potential to deliver higher returns.

Your pension returns are also reinvested, so you benefit from the effect of compounding. Over decades of paying into a pension, taking more risk in the early years can mean your pension is larger at retirement.

Traditionally, pension savers will take more risk in their early years, before moving into lower-risk options as they near retirement. Your pension provider may automatically do this for you. So, it’s important they have accurate information about when you hope to retire.

Of course, age isn’t the only thing you need to consider when deciding how much risk to take with your pension, but it is an important factor.

What impact could low-risk investments have on your retirement?

It can be difficult to understand how the decisions you make now could affect your retirement.

Pension providers must provide you with a forecast of how your pension will grow. While these are not guarantees, they can provide a useful indicator of how your pension will change over the years.

Each pension fund will be made up of different assets, including equities, which are one of the main assets that will help you grow your pension. An “adventurous” fund with a higher risk level is likely to have a higher mix of equities. Reviews from the Financial Conduct Authority (FCA) highlight the impact this can have.

The FCA conducts a review of investment return assumptions every 4–5 years; the last review was in 2017. According to an Interactive Investor report, the real rate of return, which considers the impact of inflation, is 4% for equities. This compares to 0.3% for corporate bonds and -0.5% for government bonds. Choosing a pension fund with a higher proportion of equities can have a real impact over the long term.

Being too cautious with your pension during your working life can mean the difference between achieving your retirement goals and not.

Should you switch to a different pension fund?

While there are reasons for taking more risks with your pension, you need to consider your personal circumstances.

Set out what your retirement plan is first. When do you plan to retire and how long will you be paying into your pension? As a general rule, the longer you’ll be investing your pension, the more risk you can afford to take. If you’d like to discuss if you should take more or less risk with your pension, please contact us.

If you do decide to switch to a different pension fund, it’s usually easy to do so. If you have an online account, you can typically log in and see the different options available to you. In most cases, you’ll be able to switch with just a few clicks of your mouse.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.