Many people plan for retirement by contributing to a pension scheme, but few take time to understand where their money goes. Most workplace pensions automatically invest your contributions into a Defined Contribution Default Fund, a one-size-fits-all approach that often overlooks your personal circumstances or long-term financial goals.
According to research from The Pensions Regulator, 95% of members in a defined contribution scheme remain invested in the scheme’s default fund. But is this really the best option for you?
In this article, we break down what Defined Contribution Default Funds are, explore their pros and cons, and help you consider whether staying in the default fund or transferring your pension could better serve your retirement plans.
Before diving in, watch a short video explanation from Independent Financial Adviser and CEO of Cameron James, Dominic James Murray. He shares expert insight on default pension funds and what actions you might want to consider:
🎥 Check out our YouTube channel for more expert guidance on UK Pension Transfers
What Is a Defined Contribution Default Fund? Why Do They Exist?
Your employer automatically enrols you in the company pension scheme when you start a new job, unless you choose to opt out. Unless you actively select a different investment option, your contributions will go into a Defined Contribution Default Fund. This is the scheme’s standard investment strategy.
The law requires employers and pension scheme trustees to keep their default fund appropriate for their scheme. This means pension funds generally take a very similar ”average” approach with their employees' money. This does not imply that default funds are the best pension option or provide the best value for each contributor.
Employers and pension providers typically encourage employees to invest in a default fund because it’s designed to suit the average worker.. 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 DC 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 invests an employee’s contributions from the start without requiring any action from the employee. The fund will continue to exist until the employee leaves the company or reaches retirement age. Without a defined contribution default fund, providers would hold the money in cash, earning only the same growth rate as a bank account.
What Are the Disadvantages of a Default Pension Fund?
Default funds do not tailor their investments to your specific circumstances. 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. While in your 20s, 30s or 40s you may opt to take on more investment risk. Many people do so under the assumption that at this younger age they will have more time to recover from any periods or financial crises
On the other hand, if you're in your 50s or 60s, a more conservative investment risk might be more fitting. You might want to stay away from default funds 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
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 Are Your Options with a Defined Contribution Scheme?
While defined benefit schemes may offer higher values, they are becoming increasingly rare in today’s pension landscape. For most people, defined contribution schemes now form the core of their retirement planning.
If you hold a defined contribution pension, it’s important to understand your options. You may have the ability to move your pension funds to a different provider or investment strategy that better aligns with your goals, risk tolerance, and time to retirement.
Before making any changes, ask yourself: Why am I still in my scheme’s default fund? Is it truly the right fit for your needs, or simply the path of least resistance?
Our team of experienced IFAs can help you evaluate your current pension setup and explore more tailored investment opportunities.
Can I Transfer a Defined Contribution Pension Plan?
Yes, you can transfer a defined contribution to a new provider.
When you transfer, the funds in your old pension scheme are transferred to your new pension. You may be able to keep your existing investments. Most service providers will handle the transfer for you. 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. 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?
Deciding whether to transfer your defined contribution pension is a crucial choice that depends on your personal goals and circumstances. To make an informed decision, it’s essential to explore all your options with expert advice. Our experienced IFAs are ready to help you understand the benefits and risks, ensuring your pension strategy aligns with your long-term plans.
Don’t leave your retirement to chance.
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