Defined Contribution Default Funds:
Should You Transfer Your Defined Contribution Pension Scheme?
Making pension arrangements throughout your working years is well known, but knowing and understanding where these funds are invested is equally important. All workplace pension scheme providers automatically deposit their members' contributions into a default pension fund, which may or may not be appropriate for their situations and long-term needs.
According to The Pensions Regulator's research, 95% of people who invest in a defined contribution scheme do so in the scheme's default fund. In this article, we examine default funds in depth and consider what it means to leave your money invested in one.
Before diving further, you can watch an explanation by Dominic James Murray, our CEO, and Independent Financial Advisor about the default funds and all the rationales behind Defined Contribution default funds and what you should do about it.
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What Is a Default Fund, and Why Do They Exist?
Unless you explicitly tell your employer otherwise, you are now automatically enrolled in your employer's pension plan when you start a new job. If you choose to participate, your future pension contributions will be placed in the standard ‘default' investment fund and will remain there unless you change your mind.
Employers and pension scheme trustees are required by law to keep their default fund appropriate for their scheme, which means pension funds generally take a very similar ”average” approach with their employees' money. However, this does not imply that default funds are the best pension option or provide the best value for each contributor.
Employers and pension fund providers should encourage most people to invest in a default fund because it is designed for the average employee. It keeps employees invested in a pension fund that is neither too aggressive nor too conservative in terms of the risk profile it employs.
It's also low-maintenance – for both the employer and the employee. A default fund invests a person's pension contributions in the simplest and often the cheapest way possible, without requiring the employee to do anything apart from opt in rather than opt out.
A default fund ensures that an employee's contributions are invested from the start, without the employee having to do anything. The fund will continue to exist until the employee leaves the company or reaches retirement age. Without a default fund, the money would be held in cash, earning the same rate of growth as a bank account.
What Are the Disadvantages of a Default Pension Fund?
Default funds are not tailored to your specific circumstance. You might be very young and want to be more aggressive with your investments.
If you're in your 20s, 30s, or 40s, you should take on more investment risk in your early years because you have more time to recover from any periods or financial crises, for example.
On the other hand, if you're in your 50s or 60s, you might want to stay away from default funds and be more conservative to ensure that if there is a market correction, it doesn't affect your retirement.
Therefore, you must step outside your comfort zone by investing in something besides the default fund. However, many people choose default funds because of this fund:
- Simple for employer and scheme
- Everyone Invested the same for everyone
- Straightforward to manage
However, as previously stated, the biggest drawback of remaining in a default fund is that the investments within it have not been tailored to your specific needs. They were instead chosen to meet the needs of the average scheme member. As a result, their performance is often disappointing for many people.
What Potential Actions Do You Have?
If you have a defined benefit scheme, it may be larger than your defined contribution scheme, but as the world progresses, defined benefit schemes are becoming increasingly rare.
Defined contribution schemes are significant, so please contact us. Find out how you can move your funds around, but before you do so, consider why you are even in your defined contribution scheme.
Can I Transfer a Defined Contribution Pension Plan?
Yes, a defined contribution transfer can be done to a new provider. When you transfer, the funds in your old pension scheme are transferred to your new pension. When you transfer, you may be able to keep your existing investments. Most service providers will handle the transfer for you. When you transfer, your current provider may charge you an exit fee.
When Can I Transfer My Pension Pot?
A defined contribution pension can usually be moved at any time before taking money from it. Check with your provider to see if there are any restrictions in your specific case.
In many cases, you can transfer even after you've begun receiving pension payments. However, if you think you might want to transfer money later, it's a good idea to double-check this before you start taking money.
Is It a Good Idea To Transfer My Pension?
It's an important question, and you should consider whether transferring will make you better or worse off. The suitability of a transfer will be determined by your unique circumstances and goals. This information will not cover everything you'll need to consider, but it will get you started.
Discover your options now with a free initial consultation on your Defined Contribution Pension scheme with one of our experienced and qualified IFAs. Book your convenient date through the button below.