If you have a workplace or personal pension, chances are you’re invested in a default pension fund. But it’s worth checking if that’s the best place for your money, and that the plan fits with your values and retirement goals.
What’s a default pension fund?
Under Auto-Enrolment (provided you’re eligible) your employer is legally required to sign you up for a pension. This is unless you actively choose to opt out. If you qualify for Auto-Enrolment, you’ll likely be automatically put into one of the pension scheme operator’s default funds. If you aren’t part of a workplace scheme, and instead have a personal or private pension, then your provider is required by the Financial Conduct Authority (FCA) to offer a default option.
Depending on your pension scheme, there could be different default options for different age groups. Historically, most default options were ‘lifestyle funds’ - this is where the investments are adjusted as you age..
The default fund could also be based on your target retirement age, also known as a target date fund. This is where your investments are gradually transferred into less risky options as you approach retirement, to reduce the potential for big losses just before you stop working.
The good news is that if you’re invested in a default fund your money actually gets invested without waiting around for you to choose a specific fund. This includes your pension contributions plus tax relief and contributions from your employer. The default arrangements may also have relatively low fees, and always under 0.75%, which is the Department for Work and Pensions (DWP) charge cap for the default arrangement in workplace schemes.
PensionBee has two default pension funds for different age groups - the Global Leaders Plan and the 4Plus Plan. When signing up, if you don’t choose a specific plan, you’ll be invested in one of these based on your age. If you’re under 50 and are still saving for retirement, you’ll be invested in the Global Leaders Plan. This is a predominantly equity based plan to focus on growth in your accumulation years.
If you’re 50 or over when you sign up, you’ll be invested in the 4Plus Plan. In this plan, your money is invested in a range of assets and is actively managed by experts as you approach retirement. This is a medium risk plan which is suitable for anyone who is considering accessing their pension in the near to medium term.
Is the default pension fund right for you?
More than nine-in-ten members of workplace pensions are invested in the default fund offered by their pension scheme. But just because so many people end up in the default option, doesn’t mean it’s right for you and your financial future. The default arrangements will have been chosen to meet the needs of the average scheme member – which might not match your own.
There could be a multitude of reasons why your pension scheme’s default fund might not suit your specific circumstances, and you might want to seek an alternative. Most providers offer alternative investment funds, for example PensionBee have a range of plans in addition to their default options. Here are five things to consider if you’re wondering whether to switch pension funds.
1. Do you want to take on more risk?
If you’re young, with multiple decades to go until retirement, you might prefer to take greater risks with your money, in the hope of higher returns. The default fund may just be too cautious for your needs and retirement goals. This is the case for some target date funds, which begin the de-risking process thirty years away from retirement, so starting from age 35. If you’re wondering about the risk profile of your pension plan, you can usually check the fact sheet or online dashboard to find out.
If you’re a PensionBee customer, this information is on the website under ‘Our pension plans‘. Or if you’re using the app, you can find it under ‘Account’ and then ‘Plan information’.
2. When are you intending to retire?
Typically, default schemes target a retirement age of or around State Pension age - currently 66 and rising to 67 in 2028. Because of this, they’ll reduce risk even further as you creep closer.
By lowering the amount invested in company shares (known as equities) and increasing the amount invested in bonds, your balance will be more stable as you stop working. Bonds are loans from a company or the government which is paid back with interest over a period of time. They’re typically seen as lower risk. Whereas company shares represent units of ownership in a company - by investing you’re taking on the risk of a decline in share prices as well as the opportunity of an increase in share prices. This brings more volatility to your balance.
But what if you’re thinking about retiring at a different age? If you retire earlier, you might also want to reduce risk earlier. If you’re planning on working for longer and delaying retirement, you might prefer your money to stay invested for longer too. With more time for it to benefit from compound interest and potential investment growth.
3. Do you have other sources of income?
You might also want to keep a decent stake in equities if you’re less reliant on this particular pension. For example you might be a higher earner, or have steady income from other sources, such as ISAs, rental property or defined benefit pensions elsewhere.
4. How will you use your pension to provide an income?
In order to choose the right investments to make while you’re still working, you’ll need to consider what you want to do with your pension in retirement. Before the rules changed in 2015, most people used their pension pot to buy an annuity, which pays out a guaranteed income for the rest of your life, or for a specified period.
More recently, sales of annuities saw a chunky increase as annuity rates rose - this meant people were getting more for their money. According to the Financial Conduct Authority (FCA), sales of annuities were up from 59,163 in 2022/23 to 82,061 in 2023/24. Stripping risk out of your pension makes a lot of sense if you’re intending to use it to buy an annuity on a specific date.
But nowadays pension drawdown is a more popular option. This is where your pension pot remains invested, and you make withdrawals as and when needed. Nearly 280,000 pension savers opted for drawdown in 2023/24, up 28% from the year before, according to the FCA.
If you’re intending to use drawdown, you might not want to remove all chances of growth by the day you retire, if the bulk of your money might stay invested for several decades more.
5. Where is your money invested?
You might find that you’re looking for a pension fund that’s aligned to your values. The default pension fund isn’t likely to be as specialised in its investments as a Shariah-compliant pension or socially responsible pension for example.
If you’re keen to invest in line with your values, there are options out there. PensionBee offers both a Shariah Plan - for those that want to invest according to their faith - and a Climate Plan - which invests in companies that are actively reducing their carbon emissions.
At the very least, it’s worth reviewing what pension plan you’re in - whether it’s the default fund or otherwise. Make sure the investment option suits your goals, values and circumstances - and consider switching if not. If you’re unsure about investment options and risk, consider getting guidance or advice from a qualified Independent Financial Adviser (IFA). Your workplace pension scheme may well offer a range of other funds, and moving your money could be as simple as asking the pension provider.
Faith Archer is a Personal Finance Journalist and Money Blogger at Much More With Less. Check out Faith’s YouTube series about retirement planning.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
