The defined contribution pension pot of someone who remains in a default fund is almost 700 per cent smaller than someone who actively chooses their own investments, new research has found.

Analysis of almost 80,000 members of auto-enrolment pension schemes by Hargreaves Lansdown, found that the average performance of the top 10 fund choices have outperformed default funds by 4.75 per cent over one year, 5.58 per cent each year over three years and 4.86 per cent each year over five years.

It said the average pot size is £29,996 for a chooser, compared to £3,790 for a defaulter, which is 691 per cent less. However, Hargreaves Lansdown stressed that this is a snapshot in time of the pots and is attributable to both returns and contributions.

Furthermore, over a 40 year working life someone earning £28,000 and paying 10 per cent contributions can expect a pension pot of £447,000 when they achieve a 6 per cent return after charges as opposed to £347,000 for someone who only achieves 5 per cent.

Hargreaves Lansdown said the outperformance can be attributed to two factors; the choosers tend to take on more risk, with only one of the top 10 funds representing a lower-risk option than the average default fund.

Default funds are rightly lower risk in their makeup given that they have to be a one-size fits all fund, but as pensions are simply a long term investment plan for many people there is the ability to take more risk by investing a greater proportion of their monies in the stock market, it said.

Hargreaves Lansdown senior pension analyst Nathan Long explained that the two key ways to boost your retirement pot are to pay more in and to improve your investment returns. He noted that whilst paying in more is easier to understand, it ultimately costs you more money.

“With pay packets becoming further stretched as wages fail to keep pace with inflation, taking the time to understand where your pension is invested is time well spent. Default funds are designed to be conservatively managed, they are one-size-fits-all, but that will not suit everyone,” he said.

The analysis found that those choosing their own pension investments tend to be a little older and male. The least likely to be choosers are in the North West, whereas the most inclined to choose are in the South East.

“A great starting point when trying to improve the returns from your pension investments is to understand where your workplace pension is currently invested. The stockmarket has historically given the largest returns over time, but is also tends to suffer the biggest falls in times of adversity. Most people will be investing in a pension for over 40 years. Such long time periods lend themselves to investing in riskier investments as any fluctuations in value can easily be ridden out.

“At the very least a closer look at where you are invested will help you understand what proportion of your savings are in the stockmarket, and how this is split between the UK and overseas. There is plenty of freely available information available to help you make the most of your investments, however if you are still unsure where to invest, then paying for advice can be really valuable. Getting your investment decisions right early on could allow you to leave work when you want and could provide you a comfortable retirement rather than one spent just getting by.”

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