Pension Default Funds
What is a default pension fund? Understand where your auto-enrolment contributions go and how default investments work.
Last updated: 30 January 2025
Default funds are where most auto-enrolled members' money is invested.
What Is a Default Fund
Definition
| Element | Detail |
|---|---|
| Automatic | Investment choice |
| For members | Who don't choose |
| Pre-selected | By scheme |
| Designed | For typical member |
Why Defaults Exist
| Reason | Detail |
|---|---|
| Not everyone | Wants to choose |
| Investment decisions | Can be complex |
| Suitable option | Needed |
| Prevents | Inaction problems |
Charge Cap
Legal Protection
| Rule | Detail |
|---|---|
| Maximum AMC | 0.75% |
| On default funds | Only |
| For auto-enrolment | Schemes |
| Member protection | Built in |
What This Means
| Benefit | Detail |
|---|---|
| Cannot charge more | Than 0.75% |
| On default | Investment |
| Lower charges | Often available |
| Protected | Members |
Common Default Strategies
Lifestyle/Lifestyling
| Approach | Detail |
|---|---|
| Changes over time | Based on age |
| Starts aggressive | Higher risk |
| Becomes cautious | Near retirement |
| Automatic | Adjustment |
Target Date Funds
| Approach | Detail |
|---|---|
| Based on | Retirement year |
| Single fund | For your cohort |
| Fund adjusts | For all members |
| Example | 2045 Fund |
Diversified Growth
| Approach | Detail |
|---|---|
| Multi-asset | Portfolio |
| Active management | Often |
| Risk managed | Throughout |
| One strategy | All ages |
How Lifestyling Works
Growth Phase
| Period | Investment |
|---|---|
| Early career | Higher equity |
| 20+ years out | Maximum growth |
| Risk accepted | For returns |
| Typically | 80%+ equities |
Transition Phase
| Period | Investment |
|---|---|
| 5-10 years out | Starts reducing risk |
| Gradual shift | To bonds/cash |
| De-risking | Begins |
| Automatic | Switch |
Pre-Retirement
| Period | Investment |
|---|---|
| Last 5 years | Lower risk |
| Near retirement | Conservative |
| Protect | Accumulated pot |
| Typically | More bonds/cash |
Target Date Funds
How They Work
| Feature | Detail |
|---|---|
| Named year | E.g. "2040 Fund" |
| All members | Same target together |
| Fund manages | Risk reduction |
| Professional | Oversight |
Example NEST
| Fund Name | For |
|---|---|
| NEST 2035 Fund | Retiring around 2035 |
| NEST 2040 Fund | Retiring around 2040 |
| NEST 2045 Fund | Retiring around 2045 |
| Automatically | Assigned by age |
Asset Allocation
Typical Default Mix
| Early Career | Approximate |
|---|---|
| Equities | 70-85% |
| Bonds | 10-20% |
| Other | 5-10% |
Near Retirement
| Pre-Retirement | Approximate |
|---|---|
| Equities | 20-40% |
| Bonds | 40-50% |
| Cash/Gilts | 20-30% |
Choosing to Stay
Reasons to Use Default
| Benefit | Detail |
|---|---|
| Professionally managed | Experts choose |
| Diversified | Spread risk |
| Low cost | Charge cap |
| Age-appropriate | Adjusts automatically |
Good For
| Member Type | Why |
|---|---|
| Not investment-minded | Don't need to engage |
| Typical retirement age | Default assumes this |
| Risk neutral | Average risk tolerance |
| Busy people | Set and forget |
Opting Out of Default
Alternative Funds
| Option | Detail |
|---|---|
| Ethical/ESG | Different values |
| Sharia compliant | Religious requirement |
| Higher risk | Growth seeking |
| Lower risk | Very cautious |
When to Consider
| Situation | Alternative |
|---|---|
| Strong ethics views | Ethical fund |
| Different retirement age | Adjust strategy |
| Different risk tolerance | Higher/lower risk |
| Religious requirements | Sharia fund |
Default Fund Governance
Scheme Duties
| Requirement | Detail |
|---|---|
| Design suitable | Default |
| Review regularly | Performance |
| Member interests | Prioritised |
| Charge cap | Compliance |
IGC Oversight
| Body | Role |
|---|---|
| Independent Governance Committee | For insurers |
| Reviews | Value for members |
| Challenges | Provider |
| Reports | Publicly |
Performance
Checking Performance
| Method | Detail |
|---|---|
| Annual statement | Shows returns |
| Scheme website | Performance data |
| Compare | Benchmarks |
Understanding Returns
| Factor | Consider |
|---|---|
| Time period | Long-term matters |
| Market conditions | Affect all funds |
| Charges deducted | From returns |
| After inflation | Real return |
Changing Your Choice
How to Change
| Step | Action |
|---|---|
| Log in | To scheme |
| View options | Available funds |
| Select new | Fund(s) |
| Confirm | Switch |
Considerations
| Before Changing | Think About |
|---|---|
| Why changing? | Clear reason |
| Charges | On alternative |
| Suitability | For your situation |
| Timing | Market conditions |
Employer Considerations
Choosing Scheme Default
| Factor | Consider |
|---|---|
| Workforce age | Average |
| Likely retirement | Behaviour |
| Provider options | What's available |
| Charges | Within cap |
Default Design
| Element | Importance |
|---|---|
| Suitable for most | Primary goal |
| Charge cap compliant | Required |
| Clear strategy | Understandable |
| Regular review | Ongoing duty |
Summary
Key Points
| Element | Detail |
|---|---|
| Automatic | Investment |
| Charge capped | 0.75% |
| Adjusts risk | Over time |
| Suitable | For most |
Your Options
| Choice | Consideration |
|---|---|
| Stay in default | Good for most |
| Change fund | If strong reason |
| Review periodically | Check suitability |
| Understand strategy | What it does |
Related answers
Choosing a Pension Provider
How do you choose a workplace pension provider? Compare options for auto-enrolment including NEST and other providers.
Pension Scheme Charges
What charges apply to workplace pensions? Understand annual management charges and how they affect pension pots.
Qualifying Pension Scheme
What is a qualifying pension scheme? Understand the requirements for auto-enrolment pension schemes.
Frequently Asked Questions
- What is a default pension fund?
- The default fund is where your pension contributions are invested if you don't actively choose another option. It's designed to be suitable for most members, typically a diversified mix of investments that reduces risk as you approach retirement (called a lifestyle or target-date strategy).
- Should I stick with the default fund?
- For most people, the default fund is a sensible choice. It's professionally managed, diversified, and adjusts risk over time. If you have specific views on investment, ethical preferences, or risk tolerance that differ from the default, you may want to explore other options.
- What charges apply to default funds?
- Default funds used for auto-enrolment are subject to a charge cap of 0.75% annual management charge. This protects members from excessive fees. The scheme may charge less, but cannot charge more on the default fund.