Following the introduction of Auto-enrollment in October, the National Association of Pension Funds and other pension experts warned of the potential damage to people’s pensions that transferring their funds from one employer to the next might cause. It was claimed that up to a quarter of the value of a person’s eventual pension could be lost over the course of their career as a result of moving from schemes with lower charges to those with higher charges. While the 25% quoted was a “worst case scenario”, it’s worth thinking about the effect of charges on the value of your pension.
When we invest money in a “defined contribution” type of pension fund, there are many factors that affect what we end up with at retirement, aside from the obvious one of how much we put away every month. Such factors include life expectancy, the effect of inflation, and what kind of fund we choose. However, for the sake of simplicity, I shall focus on just two:
- How strongly the investment grows
- How much the provider takes in charges
The investment growth part of the equation is down to our choice of investment manager and the fund(s) we choose. If you’ve invested in a pension recently, you’ll know what a bewildering array of funds there is to choose from, even just with one investment manager. Your choice will be determined by your attitude to risk: if you’re a “safety first” kind of person, you may go for a fund that’s heavy on Government bonds and cash; if “nothing ventured, nothing gained” is your philosophy of life, you may go for funds with a high exposure to equities in emerging markets, futures, swaps, and other more esoteric assets. Most of us probably go for something in the middle: perhaps a tracker fund, or a mixed managed fund containing a spread of equities, bonds, property and cash, so as not to be over-reliant on any one type of asset.
If you’re lucky enough to have access to a workplace pension, there may be a “default fund” in place, which you can opt for if you don’t know enough about investment to make the choice for yourself.
If you’re an employer operating a defined contribution scheme, your provider will almost certainly offer a default fund option for your members. And unless your employees are financial advisers or market analysts, you’ll probably find that a significant number of your staff go for the default fund.