High-earners using lifetime pensions modelling to reduce risk in the run up to retirement could end up missing out on more than £400,000 in their retirement pots, according to calculations by Glasgow Financial Planning firm Murphy Wealth.
The firm’s calculations suggest that even people on average salaries could be missing out on around £163,000 from their pension pots.
The potential losses happen because lifestyle pensions gradually de-risk a pension by moving money from equities into bonds and cash as pension holders near retirement, the firm said.
The de-risking often starts around 10 years before a chosen retirement date, however that reduces the potential returns on the pot when they can make the most difference, Murphy said.
Because a pension fund will be at its largest in the later years, that is when compounding can have the greatest impact – a difference of just a few percentage points in annual returns could mean tens of thousands of pounds, according to Murphy Wealth.
The firm calculated that an individual earning the current median UK salary and making the minimum pension contributions through auto-enrolment (equivalent to £132.80 per month), with 3% wage inflation applied, could build up a pot of nearly £395,500 over the course of 40 years, assuming investment growth of 6%.
But, if that growth rate is reduced to 2% for the final 10 years, which is more typical of bonds and cash Murphy said, the pot only reaches £232,500 – a difference of £163,000.
For people able to contribute an average of £500 per month over the same length of time, staying invested would create a pot of nearly £1m, while reducing the returns for the final decade would see that nearly halve to £558,000.
| Remain invested | ‘Lifestyled’ pot | Difference |
£132.80 per month | £ 395,483.76 | £ 232,475.47 | £ 163,008.29 |
£250 per month | £ 492,143.05 | £ 278,869.51 | £ 213,273.54 |
£500 per month | £ 984,286.10 | £ 557,739.02 | £ 426,547.08 |
Source: Murphy Wealth
Adrian Murphy, CEO of Murphy Wealth, said: “Lifestyle pensions were set up when people wanted to have a pot of cash available to buy an annuity. But times have changed – retirement is now a 20–30-year period when a pension needs to keep growing to maintain its longevity, perhaps taking a degree of risk off the table to reduce volatility.
“The key is to make sure an investment strategy is aligned with how people actually intend to use their wealth, rather than relying on a default pathway that may not be appropriate."