The Power of Staying Invested: Lessons from Australia for UK Members
When it comes to managing retirement savings, the decision to keep pension pots invested or access them early is pivotal.
While this choice should ultimately lie with each member, lessons from Australia reveal the benefits of staying invested during retirement – and how simple nudges can guide members toward better outcomes.
In the UK, although the Government continues to consult on proposed reforms that could drive increased consolidation in this market, the current fragmented nature of people’s retirement savings can push retirees toward more conservative choices. Both systems have their strengths and weaknesses, and there are lessons to be learned from each.
The UK’s fragmented system: A barrier to staying invested
In the UK, retirement savings are remarkably diverse. Many UK workers hold multiple pensions, with the average pension pot for men in their 60s sitting at £228,200 and for women in their 60s £152,600.1
Contrast this with Australia, where 77% of savers have just one superannuation pot. The average value of these superannuation balances for 65-69 year olds sits at £215,961* for males and £191,242* for females.2
Mercer’s analysis reveals that savers are far likelier to cash out several small pots than one large one. Most people cash out their pension entirely the very first time they access it, with these pots worth £22,600 on average.3 Additionally, the vast majority (86%)4 of pots worth less than £10,000 are cashed out in full.
“UK workers feel less of a sense of ownership when their savings are held with a trust rather than in their own bank account,” says Gary Gore, Partner at Mercer UK.
“This leads to potentially poor decisions around tax and investment, as they want to cash their savings quickly. We have a long way to go in educating members about the shortcomings of that strategy.”
Australia’s approach: Invested for longer
By contrast, Australia’s superannuation system generally encourages retirees to keep their funds invested for longer.
A recent study showed nearly two-thirds (61%)5 of Australian retirees withdrew only the minimum amount required by the federal government last financial year (between 2% and 7%, depending on their age), allowing them to minimise tax and stay invested.
Richard Dunn, Principal at Mercer Australia, attributes this to a sense of trust in the Australian system: “People don’t tend to get to retirement and rip all their money out. If there was widespread mistrust in the system, I think we’d see more of that behaviour.
“That being said, as an industry, we’re constantly working to improve member satisfaction where mistrust might arise.”
“It’s not that there’s a lack of trust in the UK DC system but rather people’s tendency to take their pension pot in one go reflects the relative immaturity of the UK market and prevalence of smaller pot sizes”
The upside of staying invested
The benefits of staying invested in retirement can be substantial and the power of compounding is crucial.
Retaining exposure to the investment market may allow retirees to achieve greater returns, even after they’ve stopped actively contributing to their pension – though they’ll also have to accept the greater risk of volatility associated with this approach.
“Most people retiring at 65 can reasonably expect to have a 20-year time horizon post-retirement, or even longer,” says JP Crowley, Senior DC Investment Consultant at Mercer UK.
“Keeping at least some savings invested makes a lot of sense in order to continue to take some advantage of the compounded growth available. Of course, this doesn’t mean putting it all on black in retirement, but it does mean developing a thoughtful strategy that balances the pursuit of continued growth with a retiree’s typically increasing desire for more certainty about how much income they will have available.”
There are also tax benefits to staying invested since pensions are a tax-efficient way of saving. Gore says: “Leaving a pension invested is immediately more tax-efficient, because it can be drawn down at a lower tax rate than if it is cashed out.”
Innovation in the UK: A silver lining
However, Australia’s approach isn’t without its challenges. While the consolidation of retirement funds has helped Australians stay invested, it has also led to a lack of innovation at the retirement stage.
Dunn calls this the “greatest weakness of the Australian system”, with limited product development and a lack of affordable advice to help retirees manage their savings. This contrasts with the UK, where the fragmented system has partly driven the development of more innovative retirement products, such as Mercer digital advice tool, Destination Retirement.
As the UK moves towards greater consolidation of retirement funds, there is an opportunity to combine the strengths of both systems. Consolidation, coupled with better education, could encourage more retirees to stay invested and reap the potential tax and investment benefits.
However, it’s vital not to lose the innovative edge that has characterised the UK’s approach so far.
“Consolidation will allow UK funds to think about their solutions differently and may spur another wave of innovation,” says Steve Coates, Head of Proposition, Mercer Workplace Savings (MWS) at Mercer UK.
“But right now, we’re managing complexity very well. I’m sure there are lessons in that for Australia, too.”
Footnotes
2. superannuation.asn.au/wp-content/uploads/2024/09/ASFA-Research-Account-balances-August-2024.pdf
3. ifs.org.uk/publications/how-important-are-defined-contribution-pensions-financing-retirement
*These figures were converted from Australian Dollar to Pound Sterling using the exchange rate correct in February 2025.- Partner, DC Consultant
- Senior DC Investment Consultant
- Head of Proposition, Mercer Workplace Savings