Right default fund equivalent to doubling contributions

Pension fund investment in the optimal default fund could have the same impact as doubling contributions, according to new research from the Tax Incentivised Savings Association (TISA).

It found that a one per cent increase in pension fund performance is equivalent to a three per cent increase in contributions over a 50-year period.

The TISA said that when you strip out the employer contribution, with minimum auto-enrolment net employee contributions at 4 per cent, this is equivalent to an individual almost doubling the minimum net amount they currently contribute.

Over the last three years, twenty of the largest pension providers’ default funds delivered returns ranging from 3.4 per cent to 11.9 per cent.

If someone on a £30,000 salary invested in a pension fund with an annual growth rate of 3.4 per cent, their fund would be valued at £153,600 after 50 years, while someone on the same salary invested in a pension scheme with an 11.9 per cent annual growth rate would have a fund valued at £2,271,200 over the same period.

Commenting on the findings, the TISA retirement policy manager, Renny Biggins, said: “Whilst a more sophisticated fund design doesn’t guarantee higher returns, the possible returns based on up to date modelling techniques should be factored into the decision-making process to increase the likelihood of enhanced retirement outcomes for employees.

“Even a marginally better performing fund can make a huge difference to someone’s retirement savings, and it doesn’t have to come at a significantly greater cost. Most larger pension providers have enough headroom to change the makeup of their default funds without breaching the government’s default fund charge cap of 0.75 per cent.”

Research from AXA has found that people aged over 40 were less willing to take investment risks, but it warned that de-risking too soon could lead to a far less comfortable retirement.

Around 69 per cent of survey respondents aged 16-21 said that they would be willing to take risks with how they invest their pension savings, while the figure falls to 50 per cent for those aged 40-54.

Sixty-five per cent of those aged 22-30 said that they would be willing to take on risk, while this fell to 58 per cent for those aged 31-39.

AXA IM head of UK wholesale distribution, Rob Bailey, said: “It is worrying to see consumers attitude to financial risk changing so dramatically the older they get, only 50 per cent of those aged 40-54 are willing to take risks. We believe there needs to be a re-calibration in attitude towards risk as people get older.”

“It is clear that people are living longer post retirement and therefore need to be aware that risk is something they should factor in their portfolio in order to have enough to fund a longer retirement period. Our research shows that we need to make people aware that by de-risking too early you may do more harm than good when it comes to funding your own retirement.”

Original Article from: https://www.pensionsage.com/pa/Right-default-fund-equivalent-to-doubling-contributions.php

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