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Could this be the secret to early retirement?

Written by: Paloma Kubiak
Taking an active approach to where your pension is invested means money is deposited into funds that can dramatically out-perform, helping you achieve an earlier, more comfortable retirement, research suggests.

With the dawn of auto-enrolment, millions of people are now paying into a workplace pension, and as such are investing for their future.

But if no active decision is made, your pension savings will go into a default fund – a conservative one-size-fits-all, typically with two-thirds of investments in shares.

Analysis of 58,000 workplace pension members by Hargreaves Lansdown revealed that the top 10 most popular funds among those who choose where to invest their pension, beat the returns of passive investors by 4.75% a year.

Looking at the average returns of the top 10 funds, Hargreaves found that active investors received 9.36% in a year, compared to 4.38% for default investors. Over a three-year period, the numbers equate to 13.24% and 8.30% respectively, while over a five-year period, the returns are 12.74% and 8% respectively.

The top 10 fund picks by active investors include: Axa Framlington Managed Balanced, Baillie Gifford Managed, Fundsmith Equity, Jupiter Global Managed Fund, LF Woodford Equity Income, Lindsell Train Global Equity, Marlborough UK Micro-Cap Growth, Newton Real Return, Standard Life Inv Global Smaller Companies and Stewart Investors Asia Pacific Leaders.

Further, its research found that 22% of pension members choose their own investments with people in their 40s most likely to make a choice. And almost half of people (47%) with a pension of more than £25,000 choose their own investments. This compares to only 5% with a pension under £5,000.

Hargreaves suggests that boosting your investment returns by just 1% every year can increase your pension by nearly £60,000 when you get to retirement, though investors will need to deal with the volatility that comes with investing in equity markets.

Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “People tend to choose their investments after their pot has built up a little or they have been a scheme member for a number of years, but you don’t have to wait; after all it’s your money and the choices you make can massively boost your retirement prospects.

“Getting started is easier than you think. Most investment brokers have their list of the top investment funds available and provide tips on how to choose something that suits you. For those who lack the time or confidence to take up the investment reins, paying for financial advice can be worthwhile.”

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