Investment growth contributes two-thirds of the value of a typical defined contribution pension pot, exceeding contributions from individuals or employers. Standard Life estimates that for a £100,000 pension, £65,000 would originate from investment growth, with £18,000 from personal contributions, £13,000 from employer contributions, and £4,000 from tax relief.
Most pensions, particularly workplace pensions, are invested in 'default funds', which are pre-selected by providers. Approximately 90% of pensions are held in these default funds. These funds primarily invest in stocks and shares in public companies, both in the UK and internationally, especially for those far from retirement. Government bonds also typically form a significant part of these investments, with some exposure to gold and commodities.
Helen Morrissey, Head of retirement analysis at Hargreaves Lansdown, advises a long-term view on pension performance, cautioning against frequent changes in response to market volatility. Such actions could lead to missing out on market recoveries and incurring unnecessary costs. Instead, understanding where money is invested and ensuring it aligns with retirement goals is key.
Taking a more active role in pension management allows individuals to choose investments that align with their values, such as avoiding specific companies or sectors like fossil fuels and gambling, or opting for Sharia-compliant funds. Since 2024, the Financial Conduct Authority has mandated that UK funds using terms like 'sustainable' or 'ESG' must adopt specific sustainable investment labels, partly due to Which? investigations. However, the number of labelled funds remains relatively low.
As retirement approaches, many pension providers implement 'lifestyling', shifting investments into lower-risk assets like bonds to mitigate market shocks. It is important to keep your target retirement age updated with your provider, as an incorrect age could lead to your pension being unnecessarily invested in lower-growth bonds for several years.