How Pension Derisking Can Cost Savers Thousands

By Retirement

Fund managers think they are doing savers a favour by safeguarding pensions in the run up to retirement, but they could be costing them thousands of pounds.

Although most people retire between the ages of 60 and 65 years old, many give up work even earlier and lose the chance to save enough cash for their later years.

Pension funds shift savings into less risky investments in the years before retirement  in a process called ‘de-risking’.

The danger is retirement savers could lose between £20,000 and £100,000 in potential cash in their pots due to managers taking steps not to expose funds to risk.

They do this by triggering a default strategy – essentially a no risk setting for savers who do not want to take chances or make decisions about their finances.

Protecting against a wipe-out

Unless savers have told their pension provider differently, the default strategy is automatically set off somewhere between five and 15 years before the retirement age set when the plan was started.

Instead of opting for shares or funds, the money is switched into less risky bonds and cash offering a much lower return.

The thinking is if markets should collapse just before retirement, the fund has no time to recover, so protecting the money in a low-risk environment is a good idea than a wipe-out.

According to online platform Hargreaves Lansdown, an investor with a £100,000 in a pension with a retirement age of 65 can easily miss out on £20,000 of savings with de-risking.

Take control of your pension

If de-risking starts at 55 years old, the pension will grow to £129, 219, while delaying until 60 would see a pot of £149,373 – a difference of £20,154.

“It is well known that we are living and working longer, so this is just another reminder that taking control of your own pension plans is the number one route to a comfortable retirement,” said Hargreaves Lansdown pension expert Nathan Long.

All workplace auto-enrolment schemes have a default trigger, but direct contribution plans, such as private SIPP pensions do not move into the safeguard mode.

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