The government’s pensions auto enrolment fund has been wildly successful. Today, 87 per cent of people have a UK pension scheme, up from 55 per cent in 2012 when the rules changed to mean that you had to opt-out of saving (rather than opt-in). The numbers are even more impressive for young people: 84 per cent of people aged 22-29 now have a workplace pension, up from 24 per cent in 2012.
A huge number of these new savers are investing their money in a NEST pension, one of the government’s main pension scheme options which now has more than six million members.
99 per cent of these six million savers are invested in NEST’s “default funds.” In other words, of the millions of new automatic savers, only 1 per cent have made a manual decision about where their money goes.
I’m one of those 1 per cent.
The default fund option in NEST is not right for me, and I think many other savers who, like me, have many decades until retirement, should consider moving their money too.
What was the NEST default fund wrong for me?
The objectives of the default fund are threefold: maximising the total size of the retirement pots; ensuring that cohorts who contribute similar amounts have similar outcomes; and, to “dampen volatility” while people are saving.
To achieve these objectives, the default fund invests a maximum of 55% of its portfolio in equities, presumably because any major volatility in the stock market would mean a temporary fall in the value of their pension, which would put off savers who will then choose to withdraw their money entirely.
Even worse, in the first five years of investing, only 35 per cent of your default fund money is in the stock market, and up to 30 per cent of your money could be invested in cash (in other words, inflating away!).
I want my retirement fund to make me as much money as possible and for me the best way to do that is to put it all in the stock market. Read my Freetrade review for more detailed reasons why.
Since I won’t be able to access my retirement fund for at least 30 years, I’m not worried about monthly or even annual fluctuations. NEST does provide alternative options for those who want to take on more risk, but even its “higher risk” fund targets a portfolio that is 70 per cent equities. The only option that is 100 per cent equities is the Sharia fund, (which also happens to be the fund that’s performed best since inception.)
In summary: the default fund is an incredibly conservative and risk-averse option, and you should consider changing it. Even if you don’t change, you should know where your money is going.
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