With many of us working for longer and opting to leave our pension savings invested in retirement so we can take an income from them via drawdown, moving into low risk investments relatively early on might not be the best option. This is because over long-term periods, shares tend to perform better than cash and gilts.
For example, according to research by online investment service Interactive Investor, based on the latest Barclays Equity Gilt Study, which measures returns from shares, gilts and cash, the average real return over the past 10 years is 5.8% for UK shares, 2.7% for gilts and -2.5% for cash savers. The real return is the return you get after inflation, or the cost of living, has been taken into account.
Using these figures, if you’d chosen a pension default fund which gradually rebalanced your investments and reduced your exposure to shares by 10% each year, putting 6% of that into gilts and 4% into cash, you’d have generated a return of just over 40% over the 10 year period – turning £100,000 into £140,493. However, if you’d left it invested fully in shares, your pension pot would be worth £35,000 more at £175,734.
However, it’s important to remember that this hasn’t been the case in every decade, and indeed there have been periods when a lower risk approach would have reaped higher rewards.
That said, over an average 10 -year period, shares have outperformed cash 91% of the time, although of course past performance shouldn’t be relied on as a guide to what will happen in future.