What is a default pension fund?

Since the introduction of auto-enrolment. Almost all employees can now save into pension funds. Most employers will enrol you in a default pension fund, but what is a default pension fund, and is it right for you? 

You may be curious about default pension funds and wonder specifically, what is a default pension fund, how does it work, and are there better alternatives?

What is a default pension fund?

If you’re asking yourself, “what is a default pension fund?”, it helps to know that your new employer usually enrols you in a workplace pension scheme and a default fund automatically.

You can choose to opt out of the default pension fund entirely. But this will mean forfeiting your employer's contributions. You will also miss out on valuable government tax relief. It is usually not a good idea to opt out. And it's not a decision to make lightly. 

The default fund is a standard investment option from pension providers. To answer the question, what is a default pension fund? It is a fund designed to be suitable for most pension savers.

A default pension fund is a convenient option. Especially for those who do not want to and/or do not have the time or investment experience to choose alternative funds themselves.

When you enrol in a default fund, as soon as you join you invest your pension savings from day one. The pension provider’s expert fund managers then actively manage funds.

Default pension funds - How do they work?

Professional fund managers are assigned to manage your default funds for you. Spreading your funds over a range of investments while protecting against inflation.

When considering what is a default pension fund, it’s important to note that default funds may also have lower management fees. Employers can often get discounts unavailable to individual investors.

The default funds usually focus on your targeted retirement age. Another name for them is ‘Lifestyle Funds’, and they concentrate on three main phases.

These phases are the 'Growth' phase, when you invest in higher-risk assets when you are younger.

The 'Transition' phase gradually moves your funds into lower-risk assets. This is generally around 10-15 years before your retirement date.

Finally, the 'Retirement' phase, where your funds are moved to safer, low-risk assets. This stage aims to protect and preserve fund values.    

So, when you are younger default funds, tend to focus on higher-risk assets. This changes to moderate and lower-risk assets as you near retirement age.

Are default funds suitable for everyone?

While targeted default retirement funds are a good idea for many, especially when first starting pension savings. They may not be suitable for everyone. One of the downsides is that they do not consider individual circumstances.

Default funds assume that you will retire at your normal pension age. This is often the same as your state pension age. And you will use your retirement funds to take a cash lump sum and then purchase an income for life as an annuity.

They may not be suitable if you plan to retire earlier or later than the fund's retirement age. Remember you can usually access your pension funds from age 55, rising to age 57 from April 2028.

Or perhaps, you intend to use a flexible drawdown instead of buying an annuity, which is a popular choice many opt for now. 

Is it possible to change or choose alternative pension funds?

Once you understand what is a default pension fund, you may want to explore the full range of pension funds offered by your provider.

You can generally invest in just one fund or diversify and spread your money over multiple funds. You can also select different risk levels, i.e. low, medium or high. The pension provider will ask you to complete a risk level assessment form.

The type of funds you can choose from will depend on your pension provider and the pension scheme you are in.

Alternatives to default funds usually include a choice of different themes. Such as ethical and environmentally friendly investments. Investments in specific countries and Sharia law compliant investments.

They will also offer certain funds which aim to generate specific annual returns. Check with your pension provider to find out what fund choices they offer.

Most providers have an online platform or mobile app where you can review your funds. You can change your fund investment choices and check charges. You can also review the past performance of funds you may consider switching to.

Should you make your own investment fund changes, professional fund managers will continue to manage the choice of investments within the individual funds.

How can I change pension funds?

If you are familiar with and have investment knowledge and experience. Changing your default funds to alternatives offered by your provider should be easy. Enabling you to build a portfolio of investments more aligned with your values and individual situation.

If you choose your own funds, it would be wise to review your investment choices regularly. This should be at least once or twice a year.

However, if you are new to pensions and unsure if you want to make changes. You should get financial advice from an FCA-Regulated financial advisor.

Remember, if you start making fund changes without advice, you could risk depreciating your fund value rather than increasing it.

A financial advisor can make recommendations to help you maximise your pension fund returns based on your situation and future financial goals.

Get expert advice

With younger employees who are just starting to build up their pensions. Default pension funds are generally a suitable, convenient, low-effort, and easily managed solution for their retirement savings.

As we age, we pay more attention to our pension fund's performance and future retirement income. Our pension funds become more critical and suddenly jump up on our list of priorities.

We all want to ensure our pension fund investments perform as well as possible to provide as much retirement income as we can ultimately achieve.

If you have changed employers, multiple times during your working life. You will likely find yourself with several pensions before you reach the age where you can access your funds.

If you are looking for a suitable pension fund. Or maybe trying to consolidate several previous funds into a better-performing, more manageable fund.

An FCA-Regulated financial advisor can help you create a personalised portfolio. They will help you match your financial goals and ultimately achieve a more certain and comfortable retirement.

Let Regulated Advice match you with a financial advisor for expert advice.