Young people see 15% jump in their DC pension pots

Rare piece of good news for younger pension savers, but experts warn this could be short-lived.

Younger pension savers have had a 15% boost to their defined contribution (DC) pots in the second quarter due to stocks performing well, research shows.

The pension boost particularly benefits the young as they are likely to have more of their retirement pots invested in stocks, says pension advisers Isio.

This typical pensions strategy is meant to rely on time to smooth out any losses from stocks before some of the pot switches to safer investments nearer retirement.

The best returns were seen by those with strategies allocating higher amounts to stocks outside the UK.

Younger people’s pots lost between 13% and 21% overall in the first quarter.

George Fowler, partner at Isio, says:

“It’s great to see pension pots recovering following a dismal Q1. It’s particularly great news for younger people, some of whom have seen returns of up to 20%.”

The pensions advisory firm says dynamic providers had a chance to buy stocks at knock-down prices during the downturn and benefit even more from the recent rally.

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The best performer among master trust strategies for younger members was Aon, at 19.9% in the second quarter, and also at 9.2% for the three years to June 2020.

By contrast, diversified, or defensive, strategies - where higher amounts are allocated to gilts and cash - recovered less well, although some still produced double-digit returns.

Pension savers with fewer than two years until retirement recovered earlier losses, with average returns a little above 9% in the second quarter after a fall of 8.7% in the first quarter. 

The best-performing strategy for people with fewer than two years to retirement was National Pensions Trust, at 13.5% in the second quarter. For the three years to June, the best performer was Aon at 7.5%.

However, despite the second-quarter boost Isio predicts continued uncertainty for the rest of 2020 with “gloomy periods” likely for DC pension savers.

“The pandemic, the end of the furlough scheme in the UK, and the forthcoming US elections could all disrupt the pension savings of UK workers. Our latest data shows the wisdom of taking a long-term view,” Fowler says.

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The latest analysis is in line with the Moneyfacts UK Personal Pension Trends Treasury Report for Q2 2020, which shows average pension fund returns at 13.3%.

The financial researcher says this is the best performance since 2009. However, it still found overall values were 4.4% lower compared to the start of the year.

Moneyfacts says those buying annuities now have average incomes 11.9% lower than a year ago. 

This was despite a small rise of 0.7% in average annual standard annuity incomes in the second quarter.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.