Pension warning as millions miss out ‘to the tune of tens of thousands of pounds’

UK equities are cheapest in the world due to Brexit says expert

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The research, conducted by Opinium on behalf of interactive investor, shows that 66 percent of people aged between 18 and 39 say they have low or medium risk pensions.

Some 19 percent have stated their pension is high risk.

This is despite ample evidence that higher risk portfolios (ones with higher exposure to equities) deliver higher growth in the long-term.

Becky O’Connor, head of pensions and savings at interactive investor, said: “Choosing the investment approach of your pension should not solely come down to your own risk appetite as an individual.

“It should be more about how long you will be investing your pension for before you give up work.”

She made clear that high risk “doesn’t mean crypto trading – it just means a higher portion of equities”.

Millions missing out on tens of thousands

Millions of people are missing out on huge returns provided by equities (Image: Getty)

Equities have massively outperformed bonds all around the world, the Credit Suisse Global Investment Returns Yearbook 2021 (CSGIRY2021) has found.

This compared average yields from bonds and equities between 1900 and 2020. The results were stark.

In the UK, bonds averaged a return of around two percent per year compared to the vastly superior return of around 5.4 percent offered by equities.

This means that a pound invested in bonds in 1900 would have turned into £10.40 by 2020 whereas a pound invested in equities would have skyrocketed to a staggering £572 over the 120 year period.

This evidence is on top of the fact that bonds are currently at historically, and chronically, low levels.

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Tom Aykin, private client director at AHR Private Clients, said: “I don’t think bonds are performing the defensive role in portfolios that they have in the past.”

The “defensive” role of assets in a portfolio is to provide a steady and reliable yield. Because of this stability, however, they tend to produce low yields compared to what one might find elsewhere.

However, 39 percent of under-40s see ‘medium’ as the most appropriate level of risk and 28 percent say the same for ‘low’.

Ms O’Connor continued: “It’s high time for some serious education around risk and growth in pensions for workers under-40.

“At the moment, millions of people who are young enough to take some risk with their investment in return for higher growth are not doing so.”

The research is especially concerning as people at this age are in their prime for being able to shoulder risk.

It is only when people approach retirement that the risk of a downturn will become front-and-centre as it has the potential to seriously dent pension pots.

“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 down the line.”

Worries over returns in private pensions are especially important in the UK, where the state pension only replaces 22 percent of average wages; barely enough to live on for most.

This means that people who don’t wish to countenance a drop in living standards in retirement will have to look to private pensions to generate a sizeable income.

Dan Mikulskis, head of investment and partner at LCP, said: “This is a failure of communication and young workers could pay a heavy price for it when they retire, in the form of lower investment incomes.”

“There is no free lunch, higher return portfolios do also carry more risk, but younger investors can often afford to take this risk. A fact that can often get missed.

He added that over the course of decades, “every percentage point counts”.

Mr Mikulskis continued: “By 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 eight percent to 12 percent or working a decade longer.”

Indeed, a recent report entitled ‘Is 12 percent the new eight percent?’ argued young workers will either need to increase their contributions or increase the level of risk in their portfolio in order to have a decent chance of retiring with a good pension pot.

Roy Walsh

Roy Walsh

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