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09 Aug 2017

Self-selected funds in auto-enrolment outperform average default funds

People with an auto-enrolment pension who actively select funds are likely to end up with a bigger pension pot, new research suggests.

Financial service company Hargreaves Lansdown found that the average performance of the top 10 funds chosen by savers outperformed the auto-enrolment default funds by 4.75% over one year, 5.58% per year over three years, and 4.86% per year over five years.

The research looked at the fund choices made in more than 300 auto-enrolment pension schemes, covering almost 80,000 members.

The outperformance can be attributed to the increased risk that fund choosers tend to take on, Hargreaves Lansdown said. Default funds are generally lower risk given that they have to be suitable for all. In fact, only one of the top 10 funds represented a lower-risk option than the average default fund.

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

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

Commenting on the findings, Hargreaves Lansdown senior pension analyst Nathan Long noted that the two key ways to boost your retirement savings are to pay more in and to improve your investment returns.

“With pay packets becoming further stretched as wages fail to keep pace with inflation, taking the time to understand where your pension is invested is time well spent. Default funds are designed to be conservatively managed, they are one-size-fits-all, but that will not suit everyone,” he pointed out.

“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. 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.”

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