Take control of your retirement before the Government does

Auto-enrollment, which will begin in October this year, is designed to ensure that all employees invest at least part of their income into a pension, but they will have little control over where their money is invested.

All companies will be obliged to enroll staff members who are not already subscribed to a pension, starting with the largest employers in October and gradually expanding to cover smaller firms too, unless the employee actively opts out.

Companies that do not have an existing occupational pension scheme will be able to use the National Employment Savings Trust (NEST), a new scheme set up by the Government to sweep up low- and middle-income earners who aren’t already enrolled in a pension.

The scheme is expensive, however, and makes little sense from the point of view of an investor looking to maximise returns over the long-term. It has been structured to ensure that reluctant investors, who have, lest we forget, been compelled into this pension scheme, are not spooked by volatility into opting out.

In effect, its investment characteristics are the opposite of what you would normally expect of a pension scheme – which would usually be at its most aggressive in the early years.

Laith Khalaf, pensions analyst at Hargreaves Lansdown, said: "From an investment point of view it makes no sense whatsoever."

Rob Gleeson, head of research at FE, agrees.

"The scheme aims to minimise volatility when you are first enrolled, to avoid worrying those who have been compelled to invest in it when they may still not be comfortable with the idea of exposure to the stock market at all."

"This is the opposite of what you’d normally want. If you’re at the beginning of your pension investment, you want to take on as much risk as possible, because you’ve got the longest time horizon."

Tim Cockerill, head of collectives research at Rowan Dartington, also takes this point of view: "Without a doubt you’ve got one objective at that age and that is to grow the pot as much as you can. You have to take more risk in order to get the potential for greater gains, so an investor at that age needs to take on higher risk."

He added: "Assuming you were to pursue a core satellite approach, somebody in their early 20s could easily put just 20 per cent into core equities and put the rest into big bets. You’ve got time on your side."

Auto-enrollment is an idea that is founded on good intentions and the Government is in a difficult position.

It would not be very British to simply force people into this scheme without allowing them to opt out, but by offering this choice it must take into account the inexperience and timidity of the people it was set up to protect.

Herein lies the fatal weakness.

Khalaf said: "It makes no sense, but we aren’t just dealing with investments, we’re dealing with the likely membership of NEST which is going to be risk-averse. They’ve done a lot of research and they’ve established pretty clearly that the likely membership would not tolerate large drops in the value of their portfolio and would simply opt out."

"As a result what you’re looking at is a compromise, and one that they are right to make."

While the Government is right to make this compromise to ensure that the maximum number of people remain enrolled in the scheme, we think the time has come for those who aren’t willing to accept it to take control of their own retirement planning.

FE Trustnet will be running a series of articles over the next three weeks explaining how to set up your own Self Invested Personal Pension, what you can put into it, and how you can manage it as you get closer to retirement.

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