How your pension is invested will affect its value and the income it will provide you later in life. If you’ve put off reviewing your pension fund, find out why it could be a worthwhile task.
While most pension providers offer savers plenty of fund options to choose from, many leave their money in the default option. Indeed, according to PensionBee (19.02.2025), more than 90% of pension savers remain in the default fund.
When you start contributing to a pension, you will usually be paying into the default fund option. This is convenient, as you don’t need to do anything, you simply make your contributions and the money will be invested through this fund.
The default fund is designed to be suitable for most savers, but it doesn’t consider personal circumstances or long-term plans.
Practical reasons the default pension option might not be right for you
The default fund doesn’t align with your risk profile
One of the main reasons you might choose to switch your pension fund is if the risk profile of the default option doesn’t suit your financial goals or circumstances.
For example, if you’re young and have decades until retirement, a default pension fund might be more risk-averse than is appropriate for you. As a result, you could miss out on investment returns, which, thanks to the power of compounding, may mean the size of your pot is significantly smaller at retirement than it had the potential to be.
According to the PensionBee research, a worker earning £25,000 a year at the age of 21 who benefits from a 2% average annual salary increase, and contributes 8% of their salary, would have £194,185 in their pension at age 68 (after an annual management charge of 0.7%) if their pension returned 3% a year.
If this individual changed their pension fund and received a 7% annual return, their pension would reach £697,247 over the same period. The higher returns could make a dramatic difference to the retirement lifestyle you can afford.
Before you switch your pension to a fund with a higher potential return, remember to balance the risks and assess what’s appropriate for you. Investment returns cannot be guaranteed, and typically, the higher the potential returns, the greater the risk.
As your financial planner, we can work with you to assess which pension fund is right for your circumstances and goals.
You are paying higher fees in the default fund
The fees you pay to your pension provider will affect the value of your pension. Take some time to review the fees you’re paying now and whether alternative options could reduce these charges.
Often, you’ll pay an annual management charge, which is typically a percentage of the value of your pension. You might also pay management or service fees.
Over the decades you’ll be saving for retirement, even a small difference in the fees you’re regularly paying could have a sizeable effect on the value of your pension when you retire.
You want your pension investments to reflect your values
Alongside financial factors, some investors may choose to consider ESG (environmental, social, and governance) factors. This could align your personal values with your financial decisions. For example, you might want to ensure your pension isn’t invested in fossil fuel companies if you’re concerned about climate change.
Pension providers will usually offer one or more ESG funds for you to switch your pension to. However, you should note that the aim of the funds can vary, and the investment decisions might not perfectly align with your values.
In addition, it’s still important to consider your risk profile and other financial factors when deciding if an ESG fund suits your needs.
Switching your pension is usually simple
The good news is that pension providers usually offer a range of funds with different risk profiles and goals. If the default pension fund isn’t the right option for you, you can often switch online in minutes.
When comparing options, you may want to look at the risk profile, the aim of the fund, and what the fund is invested in.
If you’d like to talk to a financial planner about the different investment options offered by your pension provider, and which might be right for your goals, please get in touch.
Please note:
This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.