Sticking with your pension scheme's default funds doesn’t pay

published 3 July 2019

Savers who invest their pension contributions in the "default" funds offered by providers without checking the performance of these vehicles are jeopardising their financial futures, new research warns. The best-performing default fund run by the 20 largest pension providers has returned 11.9% a year over the past three years, compared with 3.4% for the worst performer, says the Tax Incentivised Savings Association (Tisa).

Around 95% of members of defined contribution (DC) employer pension schemes opt for a default fund, rather than taking the time to explore what alternative investment options might be on offer. Many savers with personal pension arrangements do the same.

The disparity of performance threatens to have a huge impact on returns. A saver earning £30,000 a year and investing in a pension fund with an annual growth rate of 3.4% would have a fund worth £153,600 after 50 years. A fund returning 11.9% a year would grow to be worth £2,271,200.

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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.