Four million workers under 40 in low risk pensions missing out on potential for higher returns

Money jar with pension written on

An estimated four million workers under 40 could be losing out on investment returns because they are in low risk pensions that do not have potential for higher growth.

New research has found that 66 per cent of people aged between 18 and 39 – around 10 million people – say they have a low risk (25%) or medium risk (41%) pension, while only 19% say their pension is high risk.

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

According to the research by Opinium on behalf of interactive investor, the flat fee pension platform, four in ten (39%) under 40s think the most appropriate risk level for their pension is medium, with 28% saying that low risk is the most appropriate risk level. Only 20% of workers under the age of 40 thought that a higher risk pension was the most appropriate level for their age.


The risk profile of younger workers’ pension investments appears to reflect their risk appetite rather than how many years to retirement they have left: young workers do not have a high risk appetite when it comes to where their pension is invested. Only 16% described their risk appetite as high, 41% described it as medium and 33% said their risk appetite was low.

A recent report: ‘Is 12% the new 8%?’, from interactive investor and LCP, the actuarial consultants, revealed the impact that ‘lower for longer’ investment growth from global stock markets could have on the defined contribution workplace pension pots of today’s younger workers.

The report suggested younger workers would either have to increase their contributions or take other actions, such as increasing the risk level of their pension, to boost their chances of retiring with a decent retirement pot.


When it comes to expectations for returns, the Opinium research found the average expected real annual return from a pension among workers under 40 is 4.6% – almost double the 2.4% weighted average rate of return for a typical pension implied by FCA assumptions on future growth rates for different assets (page 11 ‘Is 12% the new 8%?’).

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “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.”

Dan Mikulskis, head of investment and partner at LCP, 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.

“There is no free lunch, higher return portfolios do also carry more risk, but younger investors can often afford to take this risk. A fact that can often get missed.


“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% to 12% 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.”

Risk appetite for pension investments higher among men and those in their 20s


Men are much more likely than women to say they have a higher appetite for risk when it comes to pensions and other investments, with 24% of men under 40 describing their risk appetite as high compared to 9% of women.

Men are also much more likely to say they currently have a higher risk pension than women, with 27% of men compared with 10% of women under 40 saying they have a higher risk pension.

Nearly half (49%) of men say they have a medium appetite for risk compared with 33% of women, while 43% of women said their risk appetite was low, compared with 23% of men.


Risk appetite is generally higher among workers in their twenties, with 20% saying they have a high risk appetite compared to 13% of 30 to 39-year olds, suggesting that understanding may be better among younger workers who have started working life under auto-enrolment.

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