Around four million workers under the age of 40 in the UK are losing out on investment returns, analysis by platform Interactive Investor found.
This is because they are in low-risk pensions that do not have potential for higher growth.
In a representative study of 2,000 people, around two thirds (66%) of those aged 18 to 39 – approximately 10 million of the UK population – said they have a low-risk (25%) or medium risk (41%) pension, and only 19% are in a high-risk one.
More than half (54%) of under-40s believe that a medium risk pension is going to produce the strongest returns, despite data showing that high-risk portfolios with greater exposure to equities are likely to deliver higher growth over the long term.
Respondents also believe that medium risk is the most appropriate level for their age (39%), followed by 29% opting for low risk and only 20% for higher risk.
But Interactive Investor said that the risk choice represents investors’ appetite rather than how many years they have left until retirement.
This is supported by the fact that 16% claimed their risk appetite to be high, 41% medium and 33% low.
Mismatch
This, however, does not reflect the real annual returns people expect from their pensions.
On average, under-40s believe they get 4.6%, almost double the 2.4% weighted average rate of return for a typical pension based on assumptions of future growth by the Financial Conduct Authority.
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “It’s high time for some serious education around risk and growth in pensions for workers under 40, because at the moment, millions of people who are young enough to take some risk with their investment in return for higher growth are not doing so.
“Choosing the investment approach of your pension should not solely come down to your own risk appetite as an individual, as it sometimes appears to now. It shouldn’t be about whether you like rollercoasters or would go bungee jumping. It should be more about how long you will be investing your pension for before you give up work.
“‘High risk’ in this context doesn’t mean crypto trading – it just means a higher proportion of equities. The danger is that people who put themselves in the ‘low risk tolerance’ category choose low risk pension investment mixes in the early days and miss out to the tune of tens of thousands of pounds down the line.”
Dan Mikulskis, head of investment and partner at LCP, added: “All investment funds are not equal, a higher proportion of your fund held in stocks or equities gives a bigger boost to returns prospects over the long term, yet most young workers think that medium risk is the best option for higher returns.
“This is a failure of communication and young workers could pay a heavy price for it when they retire, in the form of lower retirement incomes.
“There is no free lunch, higher return portfolios do also carry more risk, but younger investors can often afford to take this risk. A fact that can often get missed.
“Over decades, the difference becomes very large. For example, by investing all of your money in equities an average earner would expect to have £46,000 ($63,765, €54,066) more money at retirement compared to a balanced moderate risk fund. That is equivalent to increasing lifetime contributions from 8% to 12% or working a decade longer.
“Every percentage point counts. People should think like an investor, making sure they look under the bonnet to see how their funds are invested and also that the way their pension is invested is right for them.”
Gender and age imbalances
Interactive Investor also found that men are more likely to say they have a higher risk appetite than women when it comes to pensions and other investments.
Nearly a quarter of men categorised their risk level as ‘high’, compared with just 9% of women.
As a result, they are also more likely to say they have a higher risk pension than women – 27% and 10%, respectively, in the under-40 category.
Nearly half of men (49%) said they have a medium appetite risk while 33% of women said the same.
When it came to lower levels of risk, women stood at 44% and men at 23%.
Additionally, the platform found that risk appetite seems to be higher among workers in their 20s at 20% compared with 13% of those aged 30-39.
