What is a default pension fund, and should I switch? 

Auto-enrolment has helped millions of Brits start saving for retirement. 

However, for many, the pension they’re enrolled in may not be right for them. If you fall into this category, you may be unsure about what to do next. 

We reveal what a default pension fund is, how it works, and whether switching is suitable for you.  

Summary 

• Your employer enrols you in a default pension fund when you start working with them.  

• While there are benefits to using a default fund, they are not for everyone. 

• It’s a good idea to review your fund to ensure it’s right for you and switch if it’s not.  

• A financial adviser can help you pick the most suitable fund for your circumstances. 

What is a default pension fund? 

When your employer enrols you in a workplace pension, they usually automatically enrol you in a ‘default’ fund. 

If you do not wish to join the workplace pension, you must opt-out within your first month. 

The pension provider usually selects the default fund you join to suit most pension savers. These funds will often be lifestyle funds or based on your targeted retirement age. 

They may also have lower fees than investing independently, as your employer may be able to get a discount.  

If you’re younger, the fund will typically focus on riskier assets as you have time to navigate any volatility in performance, but this will change to lower-risk assets as you get closer to retirement. 

One of the risks of a default fund is that it doesn’t consider individual circumstances. 

For example, if you plan to work beyond the retirement age on the fund, you may be able to invest in riskier assets for longer, potentially boosting your pot. The fund may not be optimal if you intend to use drawdown instead of buying an annuity.  

While targeted retirement funds initially sound like a good idea, they may not suit everyone. 

Luckily, pension providers usually offer a range of pension funds from which you can choose.  

Default pension funds: who are they not suitable for? 

If you’re young and have decades until retirement, a default fund may not be suitable. 

This is because default pension funds may not be risky enough, meaning they don’t invest in higher-risk assets that can generate better returns over a long period, such as equities. 

There’s no easy way to determine the best fund, as this depends on your unique circumstances and financial goals.  

However, getting financial advice can ensure you have a diversified portfolio that matches your risk appetite and future goals.  

How do I decide if a default fund is suitable for me? 

It’s worth reviewing your default fund and considering:  

• Your age: If you’re younger, you have time to ride out volatile returns from higher-risk assets. If you’re approaching retirement, it might be worth considering low-risk assets. 

• Your risk appetite: You could opt for a higher-risk fund if you’re comfortable with more risk or want to invest in assets not available in the default fund.  

• The impact of fees: Is your default fund charging higher fees than other funds? Over time, high fees can impact your returns, so it’s always worth considering.  

• When you plan to retire: If you’re going to depend on your personal pension from the age you can access it, then you should be wary of too much risk close to retirement. However, if you plan to retire later than the default age, you may be able to accept more risk. 

• How you access your pension: Are you planning to use drawdown? If your funds are invested for longer, you may be able to invest in higher-risk assets, but this could impact your pot. If you’re considering an annuity, it’s a good idea to consider more stable assets.  

• The other pension funds you can switch to: When deciding if a default fund is suitable for you, it’s worth looking at the other funds with your pension provider. Some may invest in higher-risk assets or in ethical companies that align with your ideals.  

How to choose another pension fund and switch 

If you’re confident you want to switch away from your default fund, it’s worth exploring your other options first. 

When looking at your pension provider’s other funds, ask: 

• What is the aim of this fund? For example, it may be a lifestyle fund or focus on investing in companies that avoid fossil fuels or invest in firms that meet environmental, social, and governance (ESG) standards. A fund may aim to generate specific annual returns or invest in Shariah-compliant businesses.

• What is the fee? While the fee may be higher due to a charge cap on default funds, this may be worth considering if you get better performance and higher returns. You should also make sure you understand all the fees. For example, while PensionBee charges one annual fee, Nest charges a contribution fee on top of the annual management charge. 

• What’s the risk profile? This will depend on where the fund is invested but is usually categorised as low, medium or high. The higher the risk, the potentially higher the returns — although you could lose money if you crystallise any losses.  

• What is the fund invested in, and where? You should be able to find if the fund is invested in equities, cash, fixed income, the percentage, and location. Some funds may even reveal the top 10 companies the portfolio is invested in.  

It’s also worth getting expert advice from a financial adviser who can ensure you choose the right fund based on your circumstances and future goals. 

If you can’t seem to find a pension fund that’s right for you, they can help you create a personalised portfolio that’ll match your risk appetite.  

Once you’ve decided to switch, check with your pension provider for instructions. Often, this is done online, although it could take a few weeks to process. 

Need help with your pension? 

Unbiased can quickly match you with a qualified financial adviser who can help you select the right fund to save for your desired retirement.