Around four million workers under 40 could be losing out on investment returns as they are in low-risk pensions that do not have potential for higher growth, according to research from Interactive Investor (II).

The research, undertaken by Opinium, revealed that 66 per cent of people aged between 18 and 39, equal to around 10 million people, have a low-risk (25 per cent) or medium-risk (41 per cent) pension, whilst 19 per cent have a high-risk pension.

Furthermore, over half (54 per cent) of workers under the age of 40 think that a medium-risk pension will produce the strongest returns for their pension, despite evidence that higher risk portfolios with a greater proportion of exposure to equities are more likely to deliver higher growth over the long term.

Nearly four in 10 (39 per cent) of under-40s also viewed medium risk as the most appropriate risk level for their pension, while 28 per cent viewed low risk as the most appropriate, and just 20 per cent viewed a higher risk as most appropriate for their age.

Indeed, II suggested that the risk profile of younger workers’ pension investments reflects their risk appetite rather than how many years to retirement they have left, concluding that young workers do not have a high risk appetite for their pension investment, as only 16 per cent described their risk appetite as high, while 41 per cent described it as medium and 33 per cent said their risk appetite was low.

However, risk appetite for pension investments was found to be higher amongst men, with 24 per cent of men under 40 describing their risk appetite as high compared to 9 per cent of women.

In addition to this, nearly half (49 per cent) of men stated that they have a medium appetite for risk, compared with 33 per cent of women, while 43 per cent of women said their risk appetite was low, compared with 23 per cent of men.

Men were also much more likely to say they currently have a higher risk pension than women, with 27 per cent of men under 40 holding a higher risk pension, compared to 10 per cent of women.

Age within the under-40s bracket was identified as another impacting factor, as the research found that risk appetite is higher among workers in their twenties, with 20 per cent stating they have a high risk appetite, compared to 13 per cent of 30 to 39 year olds.

Industry experts warned that further education is needed, as the research also revealed that the average expected real annual return from a pension among workers under 40 is 4.6 per cent.

II pointed out that this is almost double the 2.4 per cent weighted average rate of return for a typical pension implied by FCA assumptions on future growth rates for different assets, based on the findings of the recent joint II and LCP report, which suggested that younger workers will have to increase their contributions or increase their risk level to boost their changes of retiring with a decent pension.

Interactive Investor head of pensions and savings, Becky O’Connor, commented: “It’s high time for some serious education around risk and growth in pensions for workers under 40, because at the moment, millions of people who are young enough to take some risk with their investment in return for higher growth are not doing so.

“Choosing the investment approach of your pension should not solely come down to your own risk appetite as an individual, as it sometimes appears to now.

“It shouldn’t be about whether you like rollercoasters or would go bungee jumping. It should be more about how long you will be investing your pension for before you give up work.

“‘High risk’ in this context doesn’t mean crypto trading – it just means a higher proportion of equities.

“The danger is that people who put themselves in the ‘low risk tolerance’ category choose low risk pension investment mixes in the early days and miss out to the tune of tens of thousands of pounds down the line.”

Adding to this, LCP partner and head of investment, Dan Mikuslkis, clarified that whilst there is "no free lunch", as higher return portfolios do carry more risk, younger investors can often afford to take this risk.

He said: “All investment funds are not equal, a higher proportion of your fund held in stocks (or equities) gives a bigger boost to returns prospects over the long term, yet most young workers think that medium risk is the best option for higher returns.

“This is a failure of communication and young workers could pay a heavy price for it when they retire, in the form of lower retirement incomes.

“Over decades, the difference becomes very large. For example by investing all of your money in equities an average earner would expect to have £46,000 more money at retirement compared to a balanced moderate risk fund. That is equivalent to increasing lifetime contributions from 8 per cent to 12 per cent or working a decade longer.

“Every percentage point counts. People should think like an investor, making sure they look under the bonnet to see how their funds are invested and also that the way their pension is invested is right for them.”

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