Most people in workplace defined contribution pensions have never actively chosen their investments. When you are enrolled, your money goes into the default fund — and for many members, it stays there for the entire period until retirement. This may be perfectly fine, or it may be costing you returns. Understanding what your default fund does, and whether it suits your situation, is one of the highest-value pension actions you can take.
How Default Funds Are Designed
Default funds must meet standards set by The Pensions Regulator (TPR) and the Department for Work and Pensions (DWP). They are typically:
- Diversified — spread across multiple asset classes (equities, bonds, property)
- Lifecycled or lifestyled — automatically shift from higher-risk growth assets toward lower-risk assets as you approach the scheme’s assumed retirement age (often 65)
- Low cost — the charge cap for default funds in auto-enrolment schemes is 0.75% per year
| Default fund type | How it works | Best suited to |
|---|---|---|
| Lifestyling | Automatically de-risks over final 5–15 years | Those planning to buy an annuity |
| Target date fund | Similar — portfolio composition shifts toward a target retirement year | Most members; set and forget |
| Blended growth fund | Static asset allocation; no automatic de-risking | Those managing their own retirement timing |
The Annuity vs Drawdown Problem
Many default funds were designed for an era when most people bought annuities with their pension pot at retirement. In that model, de-risking into bonds and cash in the years before retirement makes sense — you need stability before conversion.
But if you plan to stay invested in drawdown throughout retirement, moving to bonds and cash at 60 may be the wrong strategy. You may have 25–30 more years invested, and shifting into low-growth assets too early can significantly reduce your long-term retirement income.
Check whether your default fund is optimised for annuity purchase or drawdown — this affects whether its automatic de-risking serves your plans.
Checking Your Fund’s Performance and Charges
You can find this information in your pension provider’s online portal or in annual pension statements:
- Annual management charge (AMC): Cap is 0.75% for auto-enrolment defaults. Many default funds are 0.3–0.5%
- Performance: Compare against a relevant benchmark (e.g. MSCI World Total Return Index for a global equity fund)
- Asset allocation: What percentage is in equities, bonds, cash, property, alternatives?
- Retirement assumption age: Is it aligned to when you actually plan to retire?
When It May Make Sense to Switch
| Your situation | Suggested action |
|---|---|
| Planning drawdown not annuity | Look for a drawdown-optimised or self-select equity fund |
| More than 20 years to retirement | Default may be appropriate; check equity weighting |
| 5–10 years to retirement, active in markets | Consider whether lifestyling is de-risking too fast for you |
| Interested in ethical/ESG investing | Check if your scheme offers an ESG alternative fund |
| Default charge is 0.75% and alternatives are cheaper | Switching to a 0.3% index fund saves meaningful amounts |
Worked Example: Charge Difference Over 20 Years
Starting pot: £20,000. Monthly contributions: £300. Investment return assumption: 6%/year before charges.
| Fund charge | Total after 20 years |
|---|---|
| 0.75% (default cap) | ~£141,000 |
| 0.40% | ~£152,000 |
| 0.20% (index tracker) | ~£160,000 |
A 0.55% difference in charge produces approximately £19,000 more over 20 years in this example — roughly 13%.
How to Switch Your Pension Investments
- Log into your pension provider’s online portal or app
- Find “Investment options” or “Change my investments”
- Choose funds that suit your risk profile and retirement plans
- The switch is processed — usually within a few working days
- No tax event is triggered; no charges in most auto-enrolment schemes