What is a pension default fund and should you stay in it?
Around 90% of auto-enrolled savers remain in the default fund. For many, that is a perfectly reasonable choice. For some, it is costing them money.
- ▸A default fund is the investment option your pension contributions go into unless you actively choose something else. The employer and pension provider select it, and the FCA regulates its governance.
- ▸Most default funds are 'lifestyle' or 'target date' strategies — heavily in equities during the early years, gradually shifting to bonds and cash as the target retirement date approaches.
- ▸The FCA caps charges on default funds in auto-enrolment qualifying schemes at 0.75% per year. Most modern defaults charge 0.3–0.5%.
- ▸Switching away from the default only makes sense if you understand what you're switching to — and specifically if you want a different risk profile, lower cost, or different asset allocation.
What default funds are designed to do
When an employer sets up a workplace pension, the provider designates one fund (or a set of funds) as the default. This is where contributions go for any member who does not make an active investment choice — which, in practice, is the vast majority.
Default funds are designed by investment committees to be suitable for a broad population of savers. They aim to balance growth potential (primarily through equity exposure) against the risk of large losses near retirement. The FCA requires pension providers to review their default funds regularly and to act in members' interests when designing them.
The typical default fund invests primarily in equities (global or UK) with some allocation to bonds, property, and other asset classes. The exact mix depends on the provider and the target retirement date of the member.
Default funds are not inherently bad. They represent a considered, diversified investment strategy chosen by professionals. The question is whether that generic strategy is well-suited to the individual member — and whether the charges are competitive.
Lifestyling: automatic risk reduction near retirement
Most default funds use a mechanism called "lifestyling" or "glidepath." This automatically adjusts the asset allocation as the member approaches their expected retirement date.
A typical lifestyle profile:
- 30+ years from retirement: 80–100% equities
- 15 years from retirement: 70–80% equities, 20–30% bonds
- 5 years from retirement: 40–50% equities, 30–40% bonds, 10–20% cash
- At retirement: 25% cash (for tax-free lump sum), 50% bonds, 25% equities
The rationale is straightforward: equities have higher expected returns but greater short-term volatility. Moving away from equities as retirement approaches reduces the risk of a market crash destroying the pot just before it is needed.
The flaw in lifestyling is that it assumes a specific retirement date and strategy. If the member plans to use drawdown (staying invested during retirement) rather than buying an annuity, the automatic shift into bonds and cash may be premature. A drawdown investor might want to maintain higher equity exposure throughout.
Performance vs cost: what actually matters
Two things determine the long-term outcome of a default fund: the net return (growth minus fees) and the asset allocation.
On fees: the FCA cap of 0.75% on auto-enrolment defaults ensures that no qualifying scheme charges excessively. Most modern defaults charge between 0.3% and 0.5% total. Older workplace schemes — particularly those set up before auto-enrolment — may have default funds with higher charges, sometimes above 1%.
On asset allocation: a default fund that holds 80% equities will, over long periods, almost certainly outperform one that holds 50% equities and 50% bonds — at the cost of more volatility along the way. The right allocation depends on the member's time horizon and risk tolerance, not on the fund's label.
The pension fee calculator shows the long-term impact of different charge levels on a pot of any size.
When switching makes sense
Switching away from the default makes sense in a few specific circumstances:
The default is expensive. If the total charge (platform fee plus fund OCF) exceeds 0.5% and the scheme offers cheaper alternatives — particularly passive index trackers — the long-term saving from switching can be significant.
The lifestyling profile is wrong. If the member's retirement plan is drawdown rather than annuity purchase, the automatic de-risking in the final decade may reduce growth unnecessarily. Switching to a fund with a static or slower glidepath may be more appropriate.
The member wants a different allocation. Some default funds are UK-heavy or exclude certain sectors. A member who wants a global equity allocation, or who wants to exclude specific sectors, will need to select an alternative fund.
The member is many years from retirement. A 25-year-old in a default fund with 70% equities might prefer a fund with 90% or 100% equity exposure, accepting higher short-term volatility for potentially higher long-term growth.
Switching within the same pension scheme is usually free. Switching to a different provider entirely involves a transfer, which has its own considerations — see the guide on consolidation.
- ▸The FCA caps charges on default funds in qualifying auto-enrolment schemes at 0.75% per year of the pot value. [FCA]
- ▸Approximately 90% of auto-enrolled members remain in their scheme's default fund, according to DWP research. [DWP]
- ▸Lifestyle strategies automatically adjust asset allocation as the member approaches retirement, typically reducing equity exposure and increasing bonds and cash. [The Pensions Regulator]