5 minute read

Default pension funds: is your pension working for you?

If you are one of the 95% still in a default pension fund because you’re unsure about your options, our jargon free five-minute read helps chart a course for the retirement you deserve – today
Written by Frances Bruce
Published on 07 October 2021

What is a default pension fund and why do they exist?

When you enrol in a workplace pension scheme your money is automatically invested in a default pension fund. Default pension funds exist for two reasons:

  • they are a low-cost option for people who don’t want to make decisions about where their retirement savings are invested
  • they hold your money until you’ve decided how you want to invest it so it’s working for you until you reach retirement.


The catch? Once our pension is set up most of us don’t look back, which means 95%* of people end up staying in their pension scheme’s default fund whether they were planning to or not.

It’s helpful to understand the potential issues associated with long-term investment in default pension funds, particularly for those of us keen to earn ourselves a bigger pension pot to enjoy in retirement.

‘One size fits all’

Default pensions need to satisfy all savers and ‘one size fits all’ is a great inclusive approach. The downside is personal preferences are not catered for and the idea is for you to fine tune your preferences yourself.

For instance, in a default pension fund, your money is usually invested in cautious investments but if you’re younger with a few decades up your sleeve before your retirement, you might be keen to explore higher risk investments. As with any investing, there is the possibility that you could lose money but you have the time ahead of you to hopefully recoup any losses, as well as save more money.  If you’re closer to retirement age you might not feel the same way.

If you’re working towards specific retirement goals make sure your pension plan is synchronised with your objectives, so your hard work isn’t watered down to a ‘one size fits all’ retirement.

A narrow range of investments

Default pension funds – especially those offered by old school workplace pension schemes – tend to invest in a narrow range of investments. This can cause problems.

One of the golden rules of investing is ‘don’t put all your eggs into one basket’ so, for example, if your default pension fund mostly holds UK-centric investments and the UK market isn’t doing well, the performance of your pension may suffer.

If on the other hand your pension savings are spread across a variety of investments and markets – in other words, they are diversified – this can help you withstand the ups and downs of markets.

Cultivating curiosity about default pension funds could be the game changer you need to conquer your pension insecurities once and for all. To get your pension working for you here are some easy steps to consider that could help you feel good about your pension today:

Start where you are: explore fund options with your existing provider

Have a look at the other fund options available through your pension scheme. Is there one that matches your retirement goals and could be more suitable for you than the default fund? It’s usually straightforward to switch funds and this could be a quick win.

Grass is greener: what are other providers offering?

You don’t have to stick with the same pension provider if they don’t offer any other pension funds that appeal to you. Surprisingly, it’s usually quite straightforward to move your pension elsewhere – people do it all the time when they move jobs – but it’s not always a good idea because some pensions come with great benefits that you lose if you move. Make sure you check carefully before deciding**.

Invest in yourself

A Self-invested Personal Pension (SIPP***) unlocks the power of personal choice when it comes to managing your pension and is a popular option for independent minds.

You decide every detail around your pension investments and there is a huge range of investment funds and shares to choose from. It’s also easy to buy and sell investments within a SIPP so you can make sure your money is always working hard for your future.  Anyone who lives in the UK under the age of 75 (including your dependants) can open a SIPP.

As with all investment options, a SIPP might not work for you, so make sure you understand all the details.

Related resource

Pensions and retirement

Self-invested Personal Pensions (SIPPs)

The Best SIPP is our award-winning low-cost personal pension 

Why don’t we road test your pension plans?

Did you know we offer expert pension reviews, free of charge?

Our experts can help you make sure your plans are water-tight and on track to achieve the retirement you are working to enjoy. Issues such as checking you’re not paying exorbitant fees, tracking down past pensions and reviewing whether you are accessing all the tax allowances available to you are all explored. Fill in the form and one of our experts will give you a call.

At Bestinvest we’re here to help you get your head in the game. After all, you’re in charge of your retirement. What are you waiting for?

Important Information

The value of an investment may go down as well as up, and you may get back less than you originally invested.

This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact a financial adviser.

* Source: The Pensions Regulator, DC trust: scheme return data 2019 – 2020

** Before you consider transferring a pension, it is important to ask yourself: Will I lose any valuable benefits or features from my existing pension plan? Will I incur any penalties on my existing pension if I transfer? Is it an occupational final salary pension scheme? (in which case it is very unlikely to be advisable to transfer) Have I considered the charges on my current plan? (a new arrangement may be more expensive – especially if you have a stakeholder pension).

*** SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you, then a SIPP might not be right for you.

  

Further reading

Pensions and retirement

Should I consolidate my pensions?

Pensions and retirement

This is what happens to your pension when you leave a company

Pensions and retirement

Women, children and pensions: this is a conversation we should all be having