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Avoiding the pension regrets

5 April 2018

Making regular contributions into a pension scheme at least constitutes a welcome start for employees seeking to secure a comfortable retirement.

But some will end up more comfortable than others, depending on the amount they contribute, the length of time they do it for, the retirement planning they undertake and the funds they choose.

Recent research carried out by Aegon has found that the biggest regret evident amongst pension savers was not starting to save soon enough – a sentiment expressed by 51% of those still in work and 38% of those who have retired.

Not making a financial plan was found to be the second biggest regret (14%) for people of working age, whilst nearly as many (12%) said they wished they had been more engaged and either joined their workplace pension scheme or switched away from their default pension fund.

Employers can help employees with many of these issues by laying on generic financial education workshops and seminars, and Chase de Vere is well placed to help in this respect. Unlike most of our competitors in the employee benefits space, we also have a regulated independent financial adviser (IFA) arm.

When it comes to the issue of switching away from the default fund, in particular, employees may need one-to-one face-to-face personal financial planning advice – which we can also provide. Not all employers will feel they can afford to fund this but some may wish to split the costs with employees or at least refer employees to us.

Further recent research undertaken by Hargreaves Lansdown suggests that the employees who lament remaining in their default fund may have good reason to do so. It has found that those who selected their own funds have outperformed the default funds they opted out of by 4.89% a year over the past five years.

To point out the significance of these findings, Hargreaves Lansdown highlights the fact that improving returns by just 1% every year could save the average person £64,000 over a lifetime of pension saving!

Nevertheless, employees should be made aware that there are losers as well as winners when it comes to selecting their own funds, and a fair proportion of those who did so in this survey may well have sought professional advice.  

The key to self-selection is to know what you are doing, and investors who make choices without advice can come horribly unstuck – especially if they fall into the old trap of chasing performance and buying when the market is at its peak and selling when it is at the bottom.  

One of the key reasons for offering a default fund in the first place is to safeguard the less financially sophisticated employees against such risks. But we are dealing with a double-edged sword here because the downside is that the default fund offers a conservative one-size-fits-all solution and is not designed for employees who want to achieve the optimum results. 

Indeed, default funds have tended to become even more risk averse since the advent of auto-enrolment than they used to be, with some being invested as little as 20% in equities.       

Because the recent bull market may now have come to an end, we feel it is important to opt for a fund that holds a broad spread of different assets but we still consider equity holdings of over 40% to be appropriate in an employee’s ‘growth phase.’ 

It is important that employers make employees aware of all these issues by offering suitable financial education programmes – and, ideally, also access to personal financial planning advices. Additionally, they should make it a high priority to have a robust governance process to make sure that their default fund is at least doing what it purports to.

After all, it is not only employees who lose out if they fail to maximise their pension savings. If they find themselves unable to retire when they had originally intended to it can play havoc with their employer’s succession planning.

If you would like to find out more about how Chase de Vere can help boost pension engagement and decision making within your workforce then please do not hesitate to contact us on 0345 300 6256 or complete this simple form and we’ll call you.