Earlier this week, money expert Martin Lewis issued an urgent warning to those with workplace pensions. Speaking on ITV’s Good Morning Britain on Thursday, Lewis advised that millions of people in the UK may have the wrong retirement age set for their workplace pension, which could potentially cost them thousands of pounds in retirement. “Millions could be affected and could potentially lose out on thousands of pounds because they have the wrong retirement age,” he warned. Let’s take a closer look at what he was talking about.
The problem with having the wrong retirement age set for your pension is that there’s a chance that your investment strategy may be switched to a low-risk, low-return profile far too early, which means you could miss out on investment returns in the lead up to retirement.
You see, when you’re young and you have many years until retirement, your pension will generally be set to a growth-oriented investment strategy (assuming you have selected the default option). In other words, the bulk of your pension will be invested in stocks and other growth assets. Over the long term, this kind of strategy is likely to generate the highest returns.
As you get older and move closer to retirement, your pension provider will often adjust your investment strategy to a lower-risk, lower-growth strategy in order to protect your wealth. This is known as ‘automatic de-risking.’ With less time until retirement, you may not have time to recover from a major stock market crash, so it makes sense to allocate your money to lower-risk assets such as fixed-income securities and cash.
Check your retirement age
The issue here though is that if your pension is switched to a lower-risk strategy too early because your retirement age is set incorrectly, you could potentially miss out on thousands of pounds in retirement. For example, pension provider Aviva found that someone whose retirement age is incorrectly set at 60, instead of 67, could miss out on nearly £10,000 in retirement.
“If your retirement age is set wrong, then you move into these lower-risk funds too early – usually 15 years before you’re due to retire,” Lewis warned. His advice? “Go to your scheme and check what your retirement age is, and if it’s wrong, change it. It’s as simple as that.”
Boosting your retirement savings
Ultimately, Lewis’ warning is very much related to a concept that we regularly discuss here at The Motley Fool – asset allocation. This is the mix of assets within your portfolio.
It’s important to give some serious thought to your asset allocation (it needs to be tailored to your own financial goals, risk tolerance, and investment horizon) because it can have a huge impact on your overall wealth over the long run. For example, invest too much of your wealth in low-risk assets such as cash savings and your money won’t grow very much at all, which could have implications for your retirement. Invest in the right assets, however, and you could see your wealth grow tremendously over the long term.
If you’re looking to learn more about asset allocation, and how to build up your wealth over the long run, there is plenty of information here at The Motley Fool that could be very helpful.
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Edward Sheldon owns shares in Aviva. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.