In a white paper published last week, the discretionary manager said too many investors were simply opting for default “lifestyle” pension funds, the firm said.
The funds are based around the theory that it is better to derisk, or gradually switch from equities to bonds, as an investor nears retirement
An estimated £100bn is currently invested in lifestyle pension products, according to data from Which? Money.
But this historically popular investment strategy ignores the current economic reality, the firm argued, where longer life expectancy, pension freedoms and diminished bond yields have changed the name of the game.
“With a huge number of default pension funds automatically reducing risk as retirement approaches, many investors are sleepwalking into an uncertain retirement,” said 7IM CIO and co-author of the research paper Chris Darbyshire.
To challenge these preconceived notions about risks, the firm modelled returns for two investors.
Each saved an average of around £7,500 per year from the age of 30 to 60, retiring with an annual pension of £22,000 per year. But one was in a moderately cautious portfolio targeting a return of 4% a year, while the other was in a balanced mandate, targeting a return of 5%.
The team found the balanced investor had around £275,000 left over at the same time as the moderately cautious investor had run out of money at age 86.