A new study claims that 1% higher annual pension returns could add £150,000 to a worker's pot by retirement. The maths is real. The applicability for most readers, less so.
5 min read - Part of News & Updates at FreeBefore65.
A study released by Smart Pension this week has been doing the rounds in the personal finance press. The headline: a 1% increase in annual investment returns could add more than £150,000 to a pension pot over a working career. The implication readers are taking from the coverage is that fund choice matters enormously, and that anyone in an under-performing workplace default is leaving substantial money on the table.
Both halves of that implication need pulling apart.
What the study actually says
The Smart Pension analysis is based on five-year annualised performance data from 21 pension providers. The £150,000 figure comes from modelling a hypothetical 25-year-old earning £30,000 a year, starting with a pension pot of £1,000, contributing through to retirement at 65. With a 1% higher annual return compounded over 40 years, the pot ends up around £150,000 larger than the comparison case.
The maths is correct under the assumptions. Compound 1% over 40 years on a steadily growing pot, and you do get to a difference of roughly that scale. The point about long-term compounding is genuine.
Why the headline doesn't apply equally to everyone
The figure depends entirely on the 40-year time horizon. For people closer to retirement, the same 1% lever produces a much smaller effect.
A 45-year-old with 20 years to retirement sees roughly £50,000 to £70,000 of additional pot from a 1% return uplift, depending on contribution levels. Still material, but a third of the headline.
A 55-year-old with 10 years to retirement sees perhaps £15,000 to £25,000. Useful, not transformative.
For early retirees who've already stopped contributing, the 1% lever applies only to the existing pot's compounding through to retirement and beyond into draw-down. The number is smaller again, though the cumulative effect on portfolio longevity in draw-down can still be meaningful.
The site's typical reader, in their 50s or 60s, gets a fraction of the £150,000 figure even if they could access the higher returns. That's not nothing. But it's not the lever the headline implies.
Who can actually access 1% better returns?
This is the harder question. The implication of the study is that workers are leaving returns on the table. The implicit suggestion is that switching to a better fund would unlock the gains.
The reality is more complicated.
Workplace pension defaults are typically lifestyle funds, with predetermined glide paths from growth-oriented to bond-heavy as retirement approaches. These funds aren't usually terrible. They're designed to be acceptable rather than optimised. Switching to an alternative fund within the same workplace scheme often offers limited differentiation. Moving to a SIPP or external provider opens up more choice but introduces complexity, charges, and the risk of selection error.
Past performance, the basis of the Smart Pension study, isn't a reliable guide to future performance. Funds that have delivered 1% above average for five years may revert to mean, or worse. Most active fund managers under-perform the index over 10 to 15 years after charges. Picking the funds that will deliver the 1% premium consistently over a 40-year career is harder than the study's framing suggests.
Charges matter as much as performance. A fund delivering 1% higher gross returns at 1% higher charges nets to zero advantage. The compounding effect on charges is the mirror image of the compounding effect on returns, and it works against you.
The source matters
Smart Pension is a workplace pension provider with over £9.5bn in assets under management. Research commissioned and published by a fund manager about the importance of fund choice has a built-in commercial alignment. That doesn't make the research wrong. It does mean the headline is being amplified by an organisation with an interest in encouraging savers to think about fund selection. Unbiased Retirement Planning UK - Why the Best Information Isn't Always Where You'd Expect It
The same study notes that workers who switch from workplace schemes to retail providers could end up worse off. That's a self-serving finding for Smart Pension, but it's also probably true on average, because retail providers usually charge more and many savers make selection mistakes when they're not defaulted into something sensible.
The honest actions worth taking
For most readers, the practical actions aren't dramatic.
- Check what your pension is actually invested in. Many workplace schemes default to a lifestyle fund that's appropriate for an average member, not necessarily for you. If your time horizon is longer than the fund assumes, you may be in a more conservative allocation than you'd choose.
- Find out the charges. A 0.5% annual charge versus a 0.3% annual charge over decades is one of the largest controllable variables in pension outcomes. The headline charge is the figure to find. Some workplace schemes are now sub-0.3%. Older legacy schemes can run substantially higher.
- Look at whether you're using any employer matching above the minimum. Most UK employers will match additional contributions up to some cap. Unused matching is straightforwardly free money, and the impact often dwarfs the fund selection question.
If you're considering a SIPP or moving pensions, get regulated advice. The complexity of consolidating, the loss of some workplace scheme benefits, and the risk of selection error mean this isn't usually a DIY decision.
The early retirement reality check
For readers approaching or in early retirement, the Smart Pension study is interesting but not actionable in the way the headline suggests. The £150,000 figure is built on a 40-year compounding horizon that doesn't apply.
What does apply is the principle that small differences in returns compound substantially over time, even shortened time horizons. For someone with 10 years between now and full pension access, plus another 25 years of draw-down beyond that, the cumulative compounding window is longer than people often realise.
But the practical levers for early retirees are different. During the accumulation years, contribution rate matters more than fund selection. During the draw-down years, withdrawal rate matters more than headline return. Tax efficiency runs across both phases.
The Smart Pension study is a useful prompt to look at what your pension is invested in and what it charges. It isn't a prompt to chase the 1% premium across providers. The lever exists. For early retirees, it's just much smaller than £150,000 suggests.
Further reading
- When the Retirement Plan Wobbles - What to Do When Markets Fall, Health Changes or Life Gets in the Way
- "Women Approaching Retirement Have Half the Savings of Men" - What the Pensions Commission Just Said
- "12.2 Million People Can't Cover Basic Retirement Needs" - What the Scottish Widows Research Actually Shows
- Auto-Enrolment Is the Floor, Not the Target: What 8% of Your Salary Actually Delivers at Retirement
Part of News & Updates at FreeBefore65.
Tony writes about his personal journey to early retirement at freebefore65.co.uk. He is not a financial adviser. All content reflects his own experience and research and should be taken as a starting point for your own thinking, not as professional advice.
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