Active investment the key to an early retirement

Published by Rachel Lacey on 12 July 2018.
Last updated on 12 July 2018

couple on laptop

Savers who engage with their pension and choose where their money is invested enjoy greater returns than those who don’t, according to new analysis from Hargreaves Lansdown.

As a result, they will either be able retire on a larger income or afford an earlier retirement.

Hargreaves Lansdown based its research on 58,000 workplace pensions. It found that the funds most commonly selected by active investors beat the returns of those who stuck with their plan’s default funds by a considerable 4.75% a year over a five-year period.

Even just boosting returns by an additional 1% can increase your overall pension by £60,000. Using the example of an individual earning £28,000 a year, the online investment platform says that if they paid 8% of their salary into their pension from the age of 22, by age 68 they would have a pot worth £190,961 assuming an annual return of 5% (less charges). However, if they managed to get a return of 6% a year, the value of their pot would be boosted to a much more impressive £250,036.

Despite the impressive results achieved by active investors, the analysis found that only 22% of pension members choose their own funds. Men were more likely to invest actively – at 26% of savers – compared to just 16% of women.

However, more positively, it found that the longer savers had been in the scheme and the more money they accrued, the more confident they became in making active investment choices.

Although default funds should be a ‘safe pair of hands’ for those investors who do not feel confident making investment decisions, they are unlikely to be among the most impressive performers. This is because they have a one-size-fits-all approach and are typically managed on a very conservative basis. In many cases,they will have only two-thirds of their money invested in shares.

Funds that are more heavily invested in the stock market may suffer from more short-term volatility, but over the longer term that a pension is usually invested will usually perform better.

The table below compares the average returns of the top 10 funds chosen by active investors with the average returns from nine default funds.

  1 Year 3 Year 5 Year
Active investors - average of top 10 fund picks 9.36% 13.23% 12.74%
Default investors - average returns from 9 providers 4.38% 8.30% 8.00%
Difference 4.99% 4.92% 4.75%


Commenting on the research, Nathan Long, senior pension analyst at Hargreaves Lansdown says: ”Many people don’t think of themselves as investors, but as soon as you are put into a workplace pension, that is exactly what you become. If you make no choices at all, your pension savings will go into a default fund. These are designed to be conservative one-size-fits-all solutions, but most workplace pensions will offer some different choices.”

He adds: “People tend to choose their investments after their pot has built up a little or they have been a scheme member for a number of years, but you don’t have to wait; after all it’s your money and the choices you make can massively boost your retirement prospects. Getting started is easier than you think. Most investment brokers have their list of the top investment funds available and provide tips on how to choose something that suits you. For those who lack the time or confidence to take up the investment reins, paying for financial advice can be worthwhile.”



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this article does address

this article does address nor mention the fact that active funds have higher charges (e.g. OCF - Ongoing Charge Figure) than passive/default funds. it would of given more balance to the article and the reader to include this, please could the author rewrite the article including an analysis of charges.