Contents7 sections
Defined contribution pension saving has become the dominant form of pension provision in the UK since auto-enrolment began in 2012. For most people, the amount in their DC pension at retirement depends almost entirely on three variables: how much was contributed, how long it was invested, and what investment returns were achieved. The first two are largely determined by employment history. The third is where informed decisions make a difference.
Yet for the majority of DC pension savers — particularly those with multiple deferred pots from former employers — investment strategy is receiving little or no attention. The default fund and the default lifestyle profile are doing what they were designed to do (broadly), but "broadly appropriate for the average member" and "optimal for your specific circumstances" are not the same thing.
The Default Fund Problem
When you join a workplace pension scheme, you are typically enrolled in the default investment strategy unless you actively choose otherwise. Default strategies are designed to be reasonable for the "average" member — but no individual is average in all relevant respects.
Default funds in large workplace schemes are typically diversified multi-asset funds with significant equity exposure in the early accumulation years. This is broadly sensible: equities offer higher expected returns over the long run, and young savers can absorb volatility. However, the default fund choice for a large scheme must be acceptable to regulators, scheme trustees, and a very wide range of members — it is not tailored to you.
As charges, investment choices, and understanding of behavioural finance have all evolved, the quality gap between the average default fund and the best available investment options has narrowed. But there is still variation: some default funds carry charges of 0.3–0.5% per year; others still run at 0.7–1.0%. Over a 30-year accumulation period, the compound effect of an extra 0.5% annual charge is substantial.
Lifestyle Profiles: Designed for Annuity, Wrong for Drawdown
The lifestyle profile — sometimes called a lifestyling strategy — is where many DC pension savers unknowingly experience a suboptimal outcome.
A lifestyle profile automatically shifts your pension investments from equities to bonds and cash over the 5–15 years before your target retirement date. The logic was developed when annuity purchase was the standard form of retirement for DC savers: you want to protect your annuity purchase price from a large equity market fall just before you buy.
However, since the pension freedoms introduced in 2015, the majority of those with larger DC pots take drawdown rather than buying an annuity. In drawdown, your pension remains invested throughout retirement. The objective is very different: rather than protecting a single large purchase, you are managing a long-term investment portfolio that must sustain potentially 30+ years of income withdrawals.
For a drawdown pension, automatically switching to bonds and cash at age 60 is almost certainly the wrong strategy. Bonds and cash will not provide the long-term growth needed to sustain a 30-year drawdown, and the risk being protected against (a crash just before annuity purchase) does not exist in a drawdown framework.
If your workplace pension has you invested in a lifestyle profile and your intention is drawdown, changing the investment strategy is one of the most straightforward and impactful adjustments you can make.
The Fund Range in a Workplace DC Scheme
Most workplace DC schemes offer a limited fund menu — typically 10–30 funds, covering equities (UK, global, US, emerging markets), bonds (UK, global, index-linked), multi-asset options, and cash. This is adequate for most accumulation purposes but may not include:
- Specific sector or thematic equity funds
- Infrastructure or real assets
- Managed drawdown strategies
- ESG/responsible investment options beyond the basic offering
- Funds from providers outside the scheme's limited selection
If the fund range meets your needs, there may be no imperative to consolidate. If you want greater investment flexibility — particularly as you approach retirement and want a more tailored investment strategy — a SIPP gives access to the full range of UK investment funds plus a much wider range of direct investments.
Consolidating into a SIPP: When It Makes Sense
Consolidating deferred workplace DC pensions into a SIPP (Self-Invested Personal Pension) gives you:
- Access to the full UK fund universe and, for some providers, international funds
- Much greater flexibility in drawdown — UFPLS, flexi-access drawdown, partial crystallisation
- Consolidated administration and reporting
- Competitive charges — modern SIPP platforms typically charge 0.25–0.45% per year on the investment, which is comparable with or better than many workplace schemes
- Better integration with drawdown strategy planning as retirement approaches
Before consolidating, always check:
Guaranteed annuity rates (GARs): Some older personal pension policies carry a contractual right to purchase an annuity at a much higher rate than the open market currently offers. GARs are non-transferable — they are lost if you move the pension. A GAR offering 10–12% annuity rate on a £100,000 pot could produce an income of £10,000–£12,000 per year for life, whereas the open market rate might be closer to £5,000–£7,000. GARs of this magnitude represent a value of the pension substantially higher than the fund value alone.
Enhanced protected tax-free cash: Some older pensions have protections allowing more than 25% tax-free cash. These protections are lost on transfer.
Employer contribution requirements: Some workplace schemes only pay employer contributions if the employee remains in the scheme. Check the rules before leaving.
Death benefits and life assurance: Some workplace DC schemes include associated life assurance cover. Review whether this coverage ends on transfer and how it would be replaced.
If none of these apply, and particularly if the scheme has high charges, limited investment options, or the lifestyle profile is inconsistent with a drawdown strategy, consolidation into a well-chosen SIPP is typically beneficial.
Sequence-of-Returns Risk: The Critical Five to Ten Years
The five to ten years before retirement — and the first five years of retirement — represent the period of greatest financial vulnerability for DC pension savers. This is because of sequence-of-returns risk.
If your pension pot is heavily invested in equities and a significant market fall occurs just before you retire, the impact is much greater than the same fall experienced 20 years earlier in accumulation:
- You have less time to recover before you need the money
- If you are about to start drawing income, the lower starting pot means every subsequent withdrawal depletes the pot more rapidly
- Unlike accumulation (where you are buying into a falling market with ongoing contributions), in retirement you are selling assets to fund living costs — which is the opposite of pound-cost averaging
This is why the investment strategy in the five to ten years before your target retirement date deserves specific attention — and why a simple lifestyle profile that mechanically switches to bonds and cash is not the right answer for most modern drawdown retirees.
A more nuanced pre-retirement strategy involves:
- Maintaining meaningful equity exposure (40–60%) even in the pre-retirement years, as equity returns remain important for long retirement periods
- Beginning to build a cash or short-duration bond "buffer" of 1–3 years of income
- Using the bucket framework to structure the portfolio so that near-term income needs are not dependent on equity performance
The Bucket Strategy: Practical Implementation
The bucket strategy offers a practical framework for managing a DC pension that is approaching or in drawdown.
Bucket 1 — Income buffer (1–2 years): Hold in cash, money market funds, or short-duration bonds. This bucket funds the next 12–24 months of income. You draw from here, not from equities. You never need to sell growth assets in a down market to meet immediate income needs.
Bucket 2 — Medium-term assets (3–7 years): Hold in a diversified multi-asset fund or a mix of global bonds and lower-volatility equities. This bucket is not funding current income but is expected to grow over the medium term. When Bucket 1 is depleted or running low, you refill it from Bucket 2 (if Bucket 2 has grown).
Bucket 3 — Long-term growth (8+ years out): Hold in global equities or higher-growth assets. This bucket is for the later years of retirement and has the longest time horizon. It is refilled from returns on the equity portfolio; it refills Bucket 2 when Bucket 2 has grown sufficiently.
The key advantage of the bucket approach is psychological as well as financial: when equity markets fall sharply, you know that your next 2 years of income are already in cash and you do not need to sell equities at depressed prices. This prevents the panic selling that destroys drawdown pension value.
Implementation in a SIPP is relatively straightforward — you hold different funds in different proportions and draw first from the cash bucket. Rebalancing between buckets is the main ongoing task.
How Global Investments can help
Investment strategy for DC pensions — particularly in the transition from accumulation to drawdown — is one of the most impactful areas of retirement planning, yet it receives relatively little attention in comparison to contribution levels or tax relief. Global Investments works with clients to review their existing DC pension investments, assess the suitability of lifestyle profiles and default funds, and structure a portfolio that is aligned with a drawdown retirement strategy.
We can help with the consolidation assessment (including the guaranteed annuity rate and protected tax-free cash checks), SIPP provider selection, and ongoing portfolio management. Contact our pensions advisory team for a DC pension investment review.
Frequently asked questions
5 questions
What is a lifestyle profile in a DC pension and is it right for me?
A lifestyle profile is an automated investment strategy that gradually shifts your pension from growth assets (equities) into lower-risk assets (bonds and cash) as you approach your target retirement date. The original logic was to protect you from a large market fall just before you buy an annuity — you don't want to find that markets have crashed and your annuity purchase power has halved. However, lifestyle profiles were designed for annuity purchase. If you plan to take drawdown — keeping your pension invested and drawing income from it — a lifestyle profile that automatically shifts to bonds and cash from age 57–60 is almost certainly wrong for you. It reduces growth potential without providing the protection you actually need.
Link to this questionHow do I change the investment strategy in my workplace DC pension?
Your scheme will have a member website or paper form process to change your fund selection and to switch out of the default lifestyle option. You need to log into your scheme's portal (or contact the scheme administrator) and review the fund range available. You can typically choose from a limited menu of funds — the range varies considerably by scheme. You can redirect future contributions to a different fund and transfer your existing pot to a different fund in a single transaction. If the scheme's fund range does not include what you want, consolidation into a SIPP gives much broader investment choice.
Link to this questionWhat is sequence-of-returns risk and why does it matter approaching retirement?
Sequence-of-returns risk is the risk that a large market fall occurs at the worst possible time — specifically, just before or at the start of your retirement. If your pension pot falls 30% in the three years before you start drawing income, your starting pot is much smaller and every subsequent withdrawal depletes it more rapidly. Even if the market subsequently recovers, the damage to a drawdown portfolio from a bad sequence of returns early in the drawing phase is permanent and much more damaging than the same fall experienced mid-accumulation. This is why the investment strategy in the five to ten years before retirement deserves separate attention.
Link to this questionShould I consolidate my workplace DC pensions into a SIPP?
Often yes, particularly if the existing scheme has limited fund choice, high charges, no useful lifestyle/drawdown investment options, or if managing multiple schemes is becoming complex. Before consolidating, check for: guaranteed annuity rates in the existing scheme (very valuable, lost on transfer); any employer contribution structure that requires you to remain in the scheme; enhanced death benefit arrangements; or any protected tax-free cash above 25%. If none of these apply, a well-chosen SIPP typically offers lower charges, much broader investment choice, more flexible drawdown options, and a platform that is designed for the full accumulation-to-decumulation journey.
Link to this questionWhat is the bucket strategy for a pension approaching retirement?
The bucket strategy divides your pension portfolio into three 'buckets' based on when you need the money. Bucket 1 holds 1-2 years of drawdown income in cash or near-cash — this is your spending buffer and you never need to sell growth assets to meet short-term income needs. Bucket 2 holds 3-7 years of income needs in medium-risk assets (bonds, multi-asset funds) that are expected to grow modestly while being less volatile than equities. Bucket 3 holds everything else in higher-growth assets (equities) for the longer-term portion of retirement. Bucket 1 is refilled from Bucket 2 periodically (when Bucket 2 has grown), and Bucket 2 is refilled from Bucket 3. The result is that equities are only sold when conditions are favourable, not when markets are down.
Link to this questionThis guide is for general information only and does not constitute financial, legal or tax advice. Pension rules, tax rates and programme details change; verify current requirements with a qualified and FCA-regulated pensions adviser before acting. Pension transfers involving defined benefits over £30,000 require regulated advice.
