If you think that your retirement income is safe because you are contributing to a pension, think again. New research shows that some funds used by pension savers are performing abysmally. If your money is invested in one of these “old banger” funds, your income at retirement could be a fraction of what you expect.

A report by Hargreaves Lansdown, the independent financial adviser (IFA), examines these old bangers in two of the biggest sectors: UK equity and managed funds. The report names and shames 45 funds that are run by some of the biggest insurers. Pension savers have about £55 billion invested in these dud funds.

Contributing to a pension is one of the most tax-efficient ways to save for retirement. The Government adds £22 for each £78 that you contribute. If you are in a occupational scheme, your employer will often contribute as well. But these perks can be eroded if your money is in a dreadful fund. The funds highlighted by Hargreaves Lansdown are a mix of retail funds and company schemes, sold mostly by IFAs more than ten years ago.

One reason why some funds have underperformed is that they are no longer looking to attract new money.

Tom McPhail, head of pensions research at Hargreaves Lansdown, says: “These funds may have been the top models in their day, but the investment choice available has widened and better vehicles for pension savings may now be available.”

UK equity and managed funds from Abbey, AXA, Barclays, Clerical Medical, Friends Provident, Norwich Union, Prudential, Scottish Equitable and Scottish Life are among the worst performers.

Investors with money in one of the worst-performing UK equity funds will have garnered returns of only two thirds of the growth achieved by the FTSE all-share index over ten years. These funds returned an average of 5.8 per cent a year over ten years, well short of the 7.7 per cent achieved by Legal & General’s UK Index Tracker, which is an average UK equities tracker fund.

Mr McPhail says: “Getting 7 per cent growth on your pension, rather than 5 per cent, will mean that you can retire five years earlier on the same income.”

A pension that has 7 per cent growth will buy an annual income on retirement of £9,722 after investing £300 a month, including tax relief, for 20 years. Invest in a fund with 5 per cent growth and you will receive £2,000 less each year. A saver who paid £300 a month into L&G’s UK Index Tracker would have a retirement pot of £56,116. However, those unfortunate enough to have invested in an average UK equity old banger would have only £51,334. If the £300 was invested in Invesco Perpetual’s Income Fund, run by Neil Woodford, the retirement pot would have grown to a stunning £85,758.

Kevin Wesbroom, pensions consultant at Hewitt, the actuarial firm, says that some old banger funds were sold by IFAs who have failed to monitor the performance. “If the IFA is not getting annual trail commission on the fund, he or she probably has no real interest in making sure the funds continue to perform. The interests of the adviser tend not to be aligned with the interests of the client. It is, therefore, up to investors to keep track of performance.”

The £8 billion Scottish Equitable Mixed underperformed the average of the balanced managed funds run by members of the Association of British Insurers by more than 20 per cent. Canada Life’s UK Equity PS4, meanwhile, was singled out as one of the worst performers. The fund, valued at about £350 million, has risen by only 5.3 per cent more than inflation since April 1997, barely increasing the value of the money paid into it over ten years. Mr McPhail says: “We can only attribute this performance to an unwavering dedication to making the wrong investment decisions at pretty much every turn.”

But investors who find that they are trapped in an old banger are in a sticky situation as they may have to pay hefty penalties to move their money elsewhere. Typical transfer penalties are between 5 per cent and 15 per cent of a policy’s value, but they can be as much as 40 per cent.

Advisers say that most investors can sidestep these charges by switching to a better-performing fund from their existing provider. Alternatively, they can take the hit in favour of better returns over the long term. Justin Modray, of Bestinvest, another IFA, says: “While transfer charges can be a disincentive, it can still be worthwhile moving if you feel that stronger performance will more than compensate by the time you retire.”

However, some old banger funds may offer attractive annuity rates. Mr McPhail says: “Before transferring to a different pension, check whether you are entitled to a guaranteed annuity rate, which can give you a signif-cantly higher income at retirement.”

To check Hargreaves Lansdown’s list of old bangers, visit www.h-l.co.uk.

Action plan

Ask your insurer or company scheme administrator what the fund performance has been over one, three, five or ten years and compare it with Hargreaves Lansdown’s list of “old bangers”.

If your company pension is an “old banger”, ask for a list of alternatives. If there is a better fund available, ask to switch. Some schemes allow you to transfer out the money you have accumulated and will still pay in employer’s contributions, but ask first. The last resort is to leave your company scheme.

If you have a personal pension, check your insurer’s website to see if better funds are available or ask an IFA for ideas. For complete control, move to a self-invested personal pension (Sipp).

Remember that penalties may apply when you switch and you could lose benefits such as guaranteed annuity rates.

CASE STUDY

MAUREEN SCOTT started to manage her own Standard Life pension six months ago and has improved its previously “awful” performance by choosing her own funds through a self-invested personal pension (Sipp) with Standard Life.

Now Ms Scott, a 45-year-old project manager for a software company, is receiving 20 per cent growth on her investment.

After consulting online tools offered by Hargreaves Lansdown and Standard Life, Ms Scott chose to transfer her money into seven funds, including Invesco Perpetual Income and Aberdeen Emerging Markets.

Ms Scott says: “As soon as I started managing my own money it made a huge difference.

“The online tools map the performance of funds on a chart, including five and three-year performance, and assess the risk profile. I plan to retire at 65, so I feel that I can take more risk now because I have 20 years to grow my investment.

“The moral of the story is that it pays to manage your fund and monitor your pension.”