Those preparing for retirement are being reminded to make their pension investments 'work hard' for them
A common pension mistake could be costing thousands of Britons up tp £400,000 in retirement savings, according to damning new research from wealth manager Murphy Wealth.
The firm's calculations show that workers on median salaries stand to lose approximately £163,000 from their final pension pots due to the automatic de-risking built into so-called lifestyle pension funds.
For higher earners, the damage is considerably worse, with potential losses exceeding £400,000.
Analysis reveals the shortfall arises because these strategies move investments away from equities and into lower-returning bonds and cash during the final decade before retirement at precisely the period when pension pots are at their peak, and the power of compounding is greatest.
Even marginal differences in annual returns during this window can translate into tens of thousands of pounds.
Lifestyle pensions operate by gradually shifting a saver's portfolio from higher-growth equities into supposedly safer assets such as bonds and cash as retirement draws nearer.
Wealth managers transition typically begins around a decade before the individual's selected retirement date.
The strategy was originally conceived for a world in which workers accumulated a lump sum and then used it to purchase an annuity, converting their savings into a guaranteed income for life.
A pension fund reaches its largest value in the years immediately before retirement, meaning this is the stage at which investment returns carry the most weight.
Switching into lower-yielding assets at precisely this moment curtails the compounding effect when it matters most, according to Murphy Wealth.
A worker earning the UK median salary and paying in the minimum auto-enrolment contributions, roughly £132.80 per month, adjusted for three per cent annual wage inflation, would accumulate close to £395,500 over a 40-year career.
This is assuming a six per cent annual return, a figure the firm describes as relatively conservative for equities.
Should that growth rate drop to two per cent for the last ten years, reflecting the typical performance of bonds and cash, the final pot shrinks to just £232,500. Those contributing £500 a month face an even more dramatic gap.
Remaining fully invested would generate a pot approaching £1million, whereas the reduced final-decade returns would cut that figure nearly in half, to around £558,000.
Adrian Murphy, the firm's chief executive, argued that the lifestyle model has failed to keep pace with how people actually spend their later years.
He said: "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. Annuities are only the go-to option in very specific circumstances."
He drew a parallel with Warren Buffett, noting that the legendary investor "has famously made 95 per cent of his vast fortune after the age of 65, and the same principle applies here, it's in the later years that compound returns work hardest for you".
Mr Murphy added: "Moving into cash means you potentially miss out when a few percentage points might mean tens of thousands of pounds.
"If you suspect you are in a lifestyle pension fund, check the date it begins to de-risk and carefully consider whether that type of product matches your plans for later life."
