Default Pension Funds Explained: Charge Caps, Lifestyling, and When to Switch

If you are a member of a workplace defined contribution pension, there is a reasonable probability that your pension savings are sitting in the scheme's default investment fund. For the majority of UK employees who have not made an active investment choice, the default fund is where auto-enrolment deposits their contributions automatically. Understanding how defaults work — and whether yours is appropriate for you — is one of the most practically important pension decisions you can make.

What Is a Default Fund?

Under the auto-enrolment legislation, every workplace defined contribution pension scheme must designate a default investment arrangement for employees who do not make an active fund selection. This is a practical necessity: the average UK employee does not want to select from dozens of investment funds, and the auto-enrolment system would fail if non-engagement meant no investment allocation.

Default funds must meet minimum governance standards set by the Pensions Regulator and the DWP. They are required to be run in members' interests, regularly reviewed, and documented through a statement of investment principles and chair's governance statement.

The DWP Charge Cap

The most significant regulatory constraint on default funds is the charge cap introduced in April 2015, which limits total charges on default funds in qualifying workplace pension schemes to 0.75% of funds under management per year (the Annual Management Charge, or AMC, basis). The cap applies to:

• All default funds in schemes used for auto-enrolment
• The AMC and most other annual percentage charges
• It does not currently apply to certain performance fees or transaction costs (though these are disclosed separately)

The 0.75% cap was designed to protect members from the eroded returns caused by high annual charges. Before the cap, many smaller occupational scheme defaults carried charges of 1.5% or more, which compound dramatically over decades. The difference between a 0.75% and a 1.5% annual charge on a £100,000 fund over 20 years, assuming 6% gross returns, is roughly £30,000 in lost value.

NEST (the National Employment Savings Trust) has a different structure — it levies a 0.3% annual management charge plus a 1.8% contribution charge on money going in. This two-part structure remains in place as of 2026. The combined effect typically equates to an overall annual charge of around 0.5% over the lifetime of a pot, within the 0.75% cap. Most other major master trusts — including the People's Pension, NOW: Pensions, Smart Pension, and Aviva's master trust — operate defaults well within the 0.75% cap.

Lifestyling and the Glidepath

Most default funds in the UK operate on a lifestyling basis. This means that as you approach your target retirement date, the fund automatically shifts its asset allocation from higher-risk growth assets (typically equities) toward lower-risk assets (typically bonds and cash). The shift begins a number of years before the target retirement date — often 5 to 15 years out — and is called the glidepath or de-risking strategy.

The rationale is straightforward: a 30-year-old with 35 years to retirement can tolerate short-term volatility; an investor 2 years from retirement cannot afford a 30% equity market fall just before they need to convert their pot to income. Lifestyling attempts to protect members from this tail risk automatically, without requiring them to manage their allocation actively.

Annuity lifestyle profiles are designed for members who intend to purchase an annuity at retirement. They typically shift toward long-dated gilts and investment-grade bonds as retirement approaches, reflecting the fact that annuity pricing is sensitive to long-dated gilt yields. As gilts rise in yield, annuity rates improve; as they fall, annuity rates deteriorate. Holding gilts as retirement approaches means your pot and the cost of buying income move in tandem.

Drawdown lifestyle profiles are designed for members who intend to use flexi-access drawdown rather than annuity. These profiles de-risk into more defensive multi-asset allocations rather than gilts, since drawdown does not require the liability-matching hedging that annuity purchasing does. They typically retain a higher equity allocation through to and into retirement.

The Problem with Default Lifestyling

The post-2015 pension freedoms have created a significant problem for many workplace pension defaults. Prior to 2015, most members were expected to buy an annuity at retirement, so annuity-oriented lifestyling was appropriate for the majority. After 2015, the majority of defined contribution retirees began opting for drawdown.

Many default funds were not updated quickly enough, and millions of members are in annuity-oriented lifestyle profiles despite having no intention of buying an annuity. The practical consequence: their pots de-risk into gilts at exactly the wrong time. During the gilt market sell-off in 2022 — when 30-year gilt yields rose sharply following the Truss budget — members in annuity-oriented defaults saw significant falls in their pot values at the very time when they were approaching retirement.

Furthermore, if you plan to take your pension in flexible drawdown over 20–30 years, holding a heavily bond-weighted allocation from age 55 onwards significantly impairs your long-term returns. You may have decades of investment time horizon remaining, but your pot is positioned conservatively.

The Pensions Regulator has pushed trustees and scheme providers to review and update their default strategies, but progress has been inconsistent. You should actively check your workplace scheme's default fund and understand which glidepath you are on.

NEST's Default Fund

NEST uses a five-phase investment strategy for its default:

1. Foundation phase (up to age 30): Conservative, stabilising allocation to build confidence and limit early losses that might discourage members.
2. Growth phase (30 to 5 years before target date): Diversified growth portfolio with a substantial equity allocation, targeting long-term capital accumulation.
3. Consolidation phase (5 years before target date): Gradual de-risking, reducing equity and increasing defensive assets.
4. Pre-retirement phase (target date): Lower-risk blend, depending on the chosen retirement pathway.
5. Retirement phase: Members with NEST pots in retirement can access a retirement income option.

NEST's approach has evolved over time and has generally been more thoughtful about the post-freedoms environment than some legacy schemes. However, NEST's investment choices are constrained by the low-charge structure, and the default cannot offer the breadth of a well-constructed self-directed SIPP or a bespoke occupational scheme.

When to Consider Moving Away from the Default

For the majority of younger members in straightforward circumstances, the default fund may be entirely adequate. However, there are circumstances in which actively selecting funds — or consolidating into a SIPP — deserves serious consideration:

1. You have a specific retirement income plan. If you know you plan to buy an annuity, you may want an annuity-oriented strategy. If you plan to use drawdown for 30+ years, you likely want a higher equity allocation for longer. The default may not reflect your plan.

2. You are approaching retirement and your lifestyle profile is misaligned. Check the glidepath of your scheme. If you are being de-risked into gilts but plan drawdown, switch to a drawdown-oriented profile or to a multi-asset fund.

3. You are a higher earner with strong investment knowledge. The default is designed for the median member. If you have investment expertise and a clear view of your strategy, self-directed investment in a SIPP may offer better choice, lower costs (for larger pots where the fixed costs of SIPPs are proportionally lower), and greater flexibility.

4. Your pot is large enough to justify active management. For pension pots above £150,000–£200,000, the cost savings and investment quality available through a well-managed SIPP may outweigh the simplicity benefits of the default.

5. You want ESG or responsible investment alignment. Many defaults have limited scope for members who want to align their pension with specific values. Self-directed alternatives offer greater control.

What to Check on Your Annual Pension Statement

Every year, your pension provider must send you a benefit statement (or make it available online). Key things to check in relation to your default fund:

• Current fund name and strategy
• Whether you are in a lifestyle/target date fund, and what the target date is
• Current allocation (equity, bond, cash, other)
• Annual charge (should be within the 0.75% cap; aim for under 0.5% if possible)
• Whether the profile matches your intended retirement income strategy

If you cannot find this information, contact your scheme's member helpline or access your account online via the provider's portal.

Compliance note: The value of pension investments can fall as well as rise, and you may receive back less than you invested. Past performance is not a guide to future returns. The charge cap figures and NEST structure described are correct as at June 2026 but are subject to regulatory review. Switching investment funds within a pension does not trigger a tax event but may have other consequences — check with your scheme before switching. This guide is for information only and does not constitute regulated financial advice.

How Global Investments Can Help

Many people assume that a workplace pension default is "good enough" without examining whether it actually suits their retirement plans. Global Investments can review your workplace and personal pension arrangements — including default fund alignment, charges, and investment strategy — and help you determine whether staying in the default, selecting alternative funds within the scheme, or consolidating into a bespoke SIPP better serves your long-term objectives. Contact us to discuss a pension review.