Research suggests that pension savers could be disappointed in investment returns after uncovering differing expectations between individuals and institutional investors. Understanding how much your pension is expected to grow by between now and when you want to access it is essential for planning your financial future.

Schroders questioned both institutional investors and individual investors about their expectations over the next five years. It found:

  • Institutional investors expect average annual returns of 6.1% over the next five years
  • In contrast, individual investors are expecting significantly higher returns of 10.7% over the same period
  • Notably, over the last year, individual investors have increased their expectations from 9.9% to 10.7%. However, institutional investors’ forecast has remained unchanged

Among the institutional investors questioned were pension funds, insurance companies, sovereign wealth funds and foundations across the world. The gap between expectations suggests some investors have unrealistic expectations about how well their pension will do, as well as other investments.

Charles Prideaux, Head of Investment at Schroders, said: “There appears to be a worrying disconnect between what individual investors expect from their investments and the professional investors who are often the managers of their money.

“The problem is that individual investors around the world are planning their financial lives based on a certain belief. Those decisions, if not guided by the advice of a financial planner, may be wrong if based on that belief. It could be that people, as a result, are putting too little into their retirement savings plans, or it may needlessly influence their view on the amount of risk they should take.”

Are your pension expectations realistic?

When assessing your pension expectations, this first thing to do is look at the fund you’re invested in.

Pension providers usually offer several different funds with varying risk profiles. If you’ve not selected a fund, you’ll be invested in the default option. Your pension provider should offer you information on this fund, including target performance. However, it’s important to remember that targets are not guaranteed. Pension values can be volatile when you’re looking at short-term performance; it’s essential that you look at the bigger picture and how your contributions will grow over your working life.

At this point, it’s also worth reviewing whether you’re invested in the right fund option. As stated above, there are usually several risk profiles to choose from. Your risk profile should be based on many different factors, including when you plan to retire, other long-term savings, and your overall attitude to investment risk. This is an area we can help with.

The above can give you an idea of whether your expectations are realistic. However, it can still be difficult to understand what performance means for your retirement income. This is where cashflow modelling comes in.

Cashflow modelling is a tool that can help you visualise how pension performance will deliver an income in the context of your wider circumstances. By inputting a variety of information, such as current value, contributions and expected retirement date it can help you understand a range of questions, such as:

  • What would be the overall outcome if pensions underperformed by 1% on average?
  • How could switching funds affect pension value at retirement?
  • What impact would increasing contributions now have?
  • Could I afford to retire five years sooner and still live the lifestyle I want?

Cashflow modelling isn’t an exact science and it depends heavily on the information provided. But it can give you an idea of what expectations mean to your retirement plans, as well as answering ‘what if’ questions.

Looking beyond pension funds

If the above highlight that your expectations are potentially too high, it’s important to look beyond your pension fund. Assessing how investment portfolios, mutual funds and more are likely to perform, in line with your risk profile, is an essential part of planning for the future.

If you’d like to review your investment proposition and understand what it could mean for your financial future, please get in touch. We’re here to help you understand how the investment decisions you make today could have an impact in the long term and what this means for your goals.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.