Pension savers sleepwalking into retirement
Members of the most common workplace pension risk sleepwalking into retirement by failing to engage with their savings, according to new research from Columbia Threadneedle.
The research, which was conducted by the Pensions Policy Institute found that 80% of defined contribution (DC) scheme members do not actively choose where their contributions are invested and are instead relying on the plan’s default fund.
In defined contribution pension plans, the eventual value of your pot at retirement is dependent not just on the amount that is paid in, but also on the performance of the funds that money is invested in.
Earlier this week the Office for National Statistics published figures that showed the average contribution to a workplace defined contribution pension is very low at 4%. Former Pensions Minister Steve Webb called this "shocking", saying: "A combined contribution rate of three or four times this size is likely to be needed for most workers to be able to secure an adequate income for a comfortable retirement."
Columbia Threadneedle found that in some cases as many as 99% of scheme members are in the default fund. These funds may not accurately reflect savers’ attitudes to risk or be able to deliver the performance that is required, with Columbia Threadneedle expressing concern that the majority are not actively managed and may therefore not be able to withstand stock market shocks.
By contrast, those who had set up their own personal pension were much more likely to be engaged with their savings, with just 6% plumping for the default fund.
Commenting on the findings, Dominik Kremer, head of institutional sales, EMEA at Columbia Threadneedle Investments, says: “With people living longer, the pension pots of those approaching retirement now have to be large enough to fund a lengthy retirement and our research indicates that savers relying on a defined contribution pension face an income shortfall. As this group now makes up the majority of the workforce, the number of people who could be affected is considerable.”
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.