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How to get more out of your workplace pension

Written by: Paloma Kubiak
If you’re enrolled in a workplace pension, actively picking your funds rather than remaining in the provider’s default fund could leave you with a substantially bigger retirement pot.

Aside from working longer, the two main ways to retire with a bigger pension pot are to pay more money in and improve the returns on your pension investments.

While paying more money in is easier to understand, Hargreaves Lansdown said it “ultimately costs people more money” as wages are failing to keep pace with inflation.

Instead, its research into the top 10 fund choices made in over 300 auto-enrolment schemes covering 80,000 employees found that those who actively pick funds are on track for bigger pension pots than those who remain in the default fund.

This is because default funds are designed to be conservatively managed with a “one-size fits all” model which may not suit every investor.

The research revealed that funds of the active pickers outperformed by 4.86% on average every year over the last five years compared with those who remained in the default fund choice. They have outperformed by 4.75% over year one and 5.58% per year over three years:


In monetary terms, the difference in returns can be significant: over a 40-year working life, someone earning £28,000 and paying 10% in contributions can expect a pension pot of £447,000 when they achieve a 6% return after charges as opposed to £347,000 for someone who only achieves 5%.

Hargreaves Lansdown said the outperformance can be attributed to the fact that the choosers tend to take on more risk, with only one of the top 10 funds representing a lower-risk option than the average default fund. As pensions are a long-term investment plan for many people there is the ability to take more risk by investing a greater proportion of money in the stock market.

Further, all of the top 10 funds of the choosers are actively managed, allowing the scope to deliver improved returns over time.

Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “Those choosing their own pension investments tend to be a little older and male, but this need not be the case. 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 stock market has historically given the largest returns over time, but is also tends to suffer the biggest falls in times of adversity.”

He added that most people will be investing in a pension for over 40 years and such long time periods lend themselves to investing in riskier investments as any fluctuations in value can easily be ridden out.

“At the very least a closer look at where you are invested will help you understand what proportion of your savings are in the stock market, and how this is split between the UK and overseas. Getting your investment decisions right early on could allow you to leave work when you want and could provide you a comfortable retirement rather than one spent just getting by,” he said.

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