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Are YOU at risk of missing out on thousands from your pension

Gamble: Workers have no say in which provider they hold their pension from - they are chosen by employers

Millions of workers could lose thousands of pounds in retirement because their workplace pension funds are underperforming, new analysis reveals.

About 11 million workers contribute to a company pension, which they will rely on for a good standard of living in their later years. But they face a retirement roulette wheel as some are in pension plans that are producing exceptional returns while others are stuck in ones that are seriously lagging behind.

Workers have no say in which provider they get their pension from – they are chosen by employers. And most are unaware that there are huge differences between the best and the worst retirement plans.

Two workers could pay an identical amount into their pensions over the same period, but one of them could end up with thousands of pounds less in retirement because he contributes to a less efficient scheme.

Most employees will have at least a company pension fund, unless they work in the public sector or receive an increasingly rare end-of-career pension. Workplace pension pots have risen in value by an average of 4.8% per year over the past five years, according to analysis of the biggest funds by leading trade magazine Corporate Adviser. But the best performer – National Pensions Trust – produced a return of 9.3% per year, while the worst – Now Pensions – produced growth of 0.5% per year.

Gamble: Workers have no say in which provider they hold their pension from - they are chosen by employers

Gamble: Workers have no say in which provider they hold their pension from – they are chosen by employers

Figures are calculated after charges are removed and assume a worker has 30 years to declare retirement age.

Investment returns on pensions are often volatile and the best and worst performers will vary significantly over time. Last year was particularly turbulent for investments, with almost all company pension plans losing money, according to analysis of the funds by pension policy experts First Actuarial.

Nonetheless, a year of particularly poor performance can harm workers’ long-term retirement prospects. Consistent underperformance – even by a percentage point or two – can result in a pot worth tens of thousands of pounds less in retirement.

For example, someone contributing £2,000 a year to their pension for 40 years would have a pot worth £241,600 if they enjoyed an average annual return of 5%.

But someone paying the same amount for the same term would end up with £150,800 if returns averaged 3%.

Pension consultancy Hymans Robertson believes the huge variation in pension fund performance will continue even now that volatility has subsided.

Two 45-year-olds paying the same amount could see the size of their retirement pots vary by up to 30% upon retirement, he predicts. For 25-year-olds, the difference could reach 40%.

Callum Stewart, head of defined-contribution investments at Hymans Robertson, said workers should look at their pension plan and hold their employer to account if they are unhappy.

He says, “Ask your employer: what are you doing to review the value and adequacy of my pension?

Why do pension funds vary so much?

All company pension plans attempt to achieve the same result. Their aim is to make workers’ savings grow as much as possible when they reach retirement age, but without taking too many risks.

However, how they seek to achieve this varies widely. Some invest a greater proportion in stocks – which are generally more risky, but which generate higher returns. Others opt for more bonds, which are considered less risky, but make money grow more slowly.

Some strategies inevitably prove more effective than others over the long term.

Last year was particularly bad for bonds, which meant that supposedly low-risk funds had some of the worst falls. Unfortunately, older workers close to retirement will have paid the price, as they tend to be transferred to lower risk funds.

You may be in the wrong fund

Workers rarely engage with their occupational pension. Although most plans let you decide which fund to save in, 97% put their money by default. However, the default fund may not be suitable for you. Many pension providers automatically place young workers in the riskiest funds where they have the best chance of good returns, and gradually move them to lower-risk funds as they approach retirement age. .

The logic is that if a young worker sees their pension take a big drop in the market, they have plenty of time to make up for the losses, whereas for an older worker a big drop just before retirement can be devastating.

However, more and more workers are keeping their pensions well invested until retirement. Some may not access their full pot until they reach their 70s or even 80s. Therefore, moving their savings into lower-risk funds in their 50s or early 60s may no longer be necessary and deny them the possibility of higher returns.

Henry Tapper, managing director of pension expert AgeWage, believes that most pension funds by default encourage savers to invest in low-risk investments too soon. “Most people will have to invest for decades after they stop working, and it’s worrying that most people find themselves defensively invested starting in their 50s,” he says.

Pension providers aren’t entirely to blame – they often work in the dark because they don’t know when a member wants to leave the workforce or how they plan to manage their money in retirement.

If you have retirement plans in mind, it’s worth sharing them with your provider so they can make sure you’re in the best-positioned retirement investments to get you there.

Going it alone may not be better

Some workplace pension plans allow savers to choose their own funds and it can be tempting to go it alone. However, all but the most experienced investors are probably better off choosing the best default fund available. Phil Brown, director of policy at People’s Partnership, provider of The People’s Pension, says: “Do-it-yourself investors often make mistakes, including not diversifying their investments, being overly cautious or not paying enough attention to their funds.

Alan Morahan, commercial director of financial services firm Punter Southall Aspire, adds that if you select your own funds, you need to stay on the ball. “I’ve seen many occasions where people have chosen their own funds, but don’t regularly revisit those decisions. They then end up sitting in funds that are underperforming or no longer fit the individual’s risk profile,” he says.

Eight golden rules for getting the best retirement income

The default fund from a reputable retirement provider is usually a good long-term option, but some are better than others. Although workers have no say in who they save with, you can still take steps to achieve the best retirement lifestyle possible.

1) Join your company plan. If you don’t, you are forfeiting free money. Employers generally have to contribute at least three per cent of your earnings above £6,240 to your pension. All pension savings are tax exempt.

2) Keep watching. If your pension fund misbehaves when the stock market is up, ask your employer or provider for an explanation. Hold them accountable.

3) Don’t panic. Almost all pension funds experience periods of poor performance. But in the long run, investing is almost always the best way to grow your nest egg.

4) Never unsubscribe. It can be tempting to suspend pension contributions when you’re struggling with your day-to-day finances or your pension takes a dip. But stopping for even a year can have a big impact on your retirement – ​​stay invested if you can.

5) Inform yourself. All major retirement providers offer plenty of free retirement planning information. Use it to start thinking about your options.

6) Get free advice. The government-backed Pension Wise offers everyone over 50 a free appointment to discuss their retirement options. Use it. Call 0300 330 1001 to make an appointment or visit for more information.

7) Supplement your pension when you can. If you get a raise, increase your pension contributions before you get used to having that extra money.

8) Keep your supplier informed. Pension plans don’t have a telepath. If you have specific retirement goals, let them know so they can adjust your investments accordingly.

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